White Paper | M&A in Online Specialty Retail
The McLean Group | Jones Day
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Mergers & Acquisitions in Online Specialty Retail
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looking for online resources to transform their businesses to more accurately reflect the ever increasing omni-
channel retail world. Private equity investors, who have traditionally invested in brick and mortar retailers,
have developed a strong interest in online specialty retailers following the success of Amazon, Fanatics.com,
Etsy and others in capturing a significant portion of consumer demand. Financial sponsors are attracted to the
high growth of online retailers and the long term trends.
Recent strength in the IPO market is also helping drive valuations. Some of the online retail IPO and M&A
activity is providing impressive returns to VC and private equity firms - accordingly, financial sponsors are
looking for their next growth companies. Strong debt markets due to the FED’s credit ease (interest rates are
low) also support higher valuations. Most growth retail businesses today have access to inexpensive debt,
especially if they have VC or private equity sponsors and have positive cash flows. The availability of bank
financing for large acquisitions enables private equity firms to use leverage in transactions, which further
increases valuations.
Today, investors in online retailers are investing based on the growing fundamentals of the online retail industry
- an industry that is growing and dynamic. According to
Ibisworld
, it is estimated that online retail represents
approximately $275 billion in sales in the U.S. alone and is projected to grow significantly over the coming
years. Likewise, global ecommerce annual revenue growth has exceeded 15-20% over the past three years and
was expected to reach $963 billion by the end of 2013. Despite the phenomenal growth of online sales over the
past three years, the industry still makes up less than 6.5% of the total global retail market; creating plenty of
growth opportunities for online retailers. The historical success of online retail combined with the favorable
long term outlook has attracted investors to the category.
Some of the trends that are driving online retail growth are:
1) The increasing use of mobile phones and tablets. Ubiquitous use of internet enabled devices is
enhancing the convenience of price comparison and online shopping. Improved logistics and enhanced
websites improve traffic and sales conversion. More competitive pricing and incredibly wide product selection
make the value proposition of online retail compelling for consumers.
2) We are now seeing how social media is helping drive traffic to well positioned online retailers.
Online retailers and brick & mortar retailers are looking at how to harness the power of Facebook, Twitter,
Instagram, Pinterest and other social media sites. It is estimated that social ecommerce sales are expected to
grow from $10 billion in 2012 to $30 billion by 2015. Additionally, strong consumer followings on Pinterest in
the fashion category, such as in the case of Modcloth's and Nasty Gal's success, illustrates how social commerce
can drive sales.
3) Lastly we are seeing a significant merger between online retail and brick and mortar. The growing
share of online retail sales has shown traditional brick and mortar retailers that in order to survive, they must be
able to reach consumers through omni-channel methods. As such, we are seeing price matching at traditional
brick and mortar retailers in order to compete with their online counterparts. Some online retailers are opening
selective brick and mortar showrooms. Additionally, the opportunities for consumers to buy online and pick up
