Woori BMO Group Says Ebay Shifts To Major Retail With GSI Deal

Press Release

28 March, 2011 /Woori BMO Group/  Woori BMO Group wealth management executives, have today said that eBay, synonymous with second-hand products, is pursuing a brand new image in retail.

“Through an attempt to push itself into the industry of making orders for major retailers, eBay has agreed to purchase GSI Commerce, the online logistics provider, for $2.4 billion,” said Andrew Williams, Director of Institutional Equity at Woori BMO Group.  

The takeover, reported on Monday, reveals how the 16-year-old eBay takes on competitors like Amazon.com while trying to counter upstarts like Groupon.

With GSI, eBay will grow into communicating with major retailers outside its network of small power sellers. Among other items, GSI helps handle the websites and internet marketing strategies for Toys “R “Us, Aéropostale, and Kenneth Cole, and its services include payment collection, order control, and customer support.

For example, GSI’s seven warehouses will store products from a retailer, and ship and track product.

Managing orders for big retailers will be a significant departure for eBay, which has long avoided the complications of product packaging, delivery and handling returns.

Instead, retailers on its namesake website had to deal with the job on their own or turn to rivals like Amazon.

The transaction, eBay’s biggest since its $2.6 billion acquisition of Skype in 2005, said John Donahoe, the company’s chief executive, is a response to the changing market environment.

“What we see today is that globalization is quickly evolving,” he said Monday, in a phone interview.

“The gap between offline and online shopping is breaking down at a remarkable pace,” he said, creating a “multichannel climate” that transforms the way merchants conduct business and how they meet their consumers.

eBay has a mixed record of acquisitions — while PayPal was a hit, in 2009, the firm sold Skype after it struggled to achieve a lot of momentum among eBay customers.

The firm is selling a cash share of $29.25, a premium of 51 per cent over the trading price of the stock of GSI on Friday.

“It’s certainly a strike across Amazon’s bow,” said Scott Kessler, an analyst with Standard & Poor’s. “Sadly, for eBay, they will still be dogged by the Skype experience to some degree.”

Jordan Rohan, an analyst with Stifel Nicolaus, said eBay could compete with Amazon, which also provides delivery services to small companies, by combining GSI’s offerings with the eBay PayPal payment process and its Bill Me Later electronic credit program.

“eBay will also cross-sell the product GSI provides to the thousands of market vendors on eBay,” he added, “to be more economical with Amazon, they pay a fair price.”

Throughout recent months, the rivalry between eBay and Amazon has intensified as they compete for market share in the United States. Amazon’s gross revenue increased 40% last year to $34.2 billion, while eBay revenues fell 5% to $9.2 billion. In 2010, GSI reported sales of $1.4 billion.

Unlike Amazon, which markets a lot of its products, Mr. Donahoe said that eBay described its role as linking buyers and sellers. “We are not competing with our customers,” he said.

Donahoe said that GSI will be able to take advantage of eBay’s internet commerce experience (a division that is well on target to report $4 billion in gross merchandise revenue this year) and that eBay will be able to advertise its PayPal service at retailers’ sites through GSI.

Eventually, the central platform of eBay might also act as an avenue for major GSI merchants should they choose to get rid of excess inventories. “We can also make GSI’s listed on eBay simpler over some time; it may be by listings, flash sales, or their stores,” he added.

Regional shopping markets, Mr. Donahoe said, reflect a “great opportunity” and eBay is also looking to step up its efforts there. Last year eBay paid $75 million for Milo, a local shopping search engine.

However, with businesses like Groupon – which is said to be planning a $25 billion public offering – dominating the intersection between the Web and local retailers, eBay still faces obstacles on that front.

Kerry Rice, an analyst with Wedbush Securities, said eBay would need to make a big local online retail acquisition.

“I think it’s tough, I don’t think they have a lot of local market share in mind or market share,” he said. “Without local, they will be efficient, but it would be a missing piece of the equation.”

eBay also plans to divest some GSI properties according to the contract revealed.

The corporation is selling all of GSI’s sports merchandising assets and divests 70 per cent of Rue La La and ShopRunner itself. According to analyst reports, Rue La La, a flash shopping platform purchased by GSI via its 2009 acquisition of Retail Convergence, has been a drain on GSI’s earnings. The app, a competitor to Gilt Group and HauteLook, is part of the customer experience division of GSI, which last year lost about $9 million.

eBay, which called the properties “not the cornerstone of its long-term growth plan,” will put ShopRunner, a member-only shopping program, and Rue La La in a new holding firm owned by GSI’s chairman, Michael Rubin providing a $467 million loan to the community.

According to some observers, the decision by eBay to dispose of its controlling stake in Rue La La is an important one, particularly despite the difficulties of the company.

“eBay has demonstrated a growing interest in the market by purchasing a German rival, Brands4friends, for around $200 million in cash at the end of last year,” said Edward Seung-Woo, European Equities Trader at Woori BMO Group. 

On Monday, eBay’s stock dropped 4.3 per cent, while GSI’s stock jumped 50.7 per cent.

The deal, scheduled to close in the third quarter of this year, involves a “go-shop” window of 40 days within which GSI will consider competing bids.

eBay is represented by Goldman Sachs and the Peter J. Solomon Group, while Dewey & LeBoeuf is the legal counsel. Morgan Stanley advises GSI Business while Morgan, Lewis & Bockius serves as their legal counsel. Davis Polk & Wardwell serves as legal advisor to a separate GSI board committee.