Vol. 10, No. 5, May 2012
Operating nationally and internationally, FOCUS currently is working with buy- and sell-side corporate clients, private equity groups, holding companies, and late stage venture capital firms in 23 areas:
We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.
By Abram Garver, FOCUS Principal*
As an investment banker focused on the web-only retail sector, speaker at the world’s largest e-commerce event, and creator of the FOCUS Web-Only Retail Index, a diverse group of constituents have asked me to keep them abreast of significant developments in the effort to end tax-free Internet sales.
During the week of April 23, 2012, Amazon announced that it had agreed to collect sales tax on items sold in Nevada beginning in 2014. This latest announcement comes just seven months after Amazon agreed to collect taxes on its sales to California residents beginning in 2013.
At the end of last year, ten Senators, led by Dick Durbin (D-IL), Mike Enzi (R-WY), and Lamar Alexander (R-TN), introduced an Internet sales tax bill called the "Marketplace Fairness Act" or “Make Amazon Money Act” as it has been referred to.
The bill gives states broad authority to require that online sellers like Amazon collect and remit state sales taxes so that online and offline retailers all operate under the same rules. The Computer and Communications Industry Association (CCIA), a DC trade group which counts eBay, Google, Microsoft, and Yahoo among its members, has blasted the bill.
Actionable Investment Commentary
Based on ongoing conversations with lobbyists, trade groups, CEOs, and private equity firms as well as strategic buyers and sellers, I believe that there is very little opposition to the Marketplace Fairness Act (MFA) and that it will become law in the next 12 months.
One new force against the tide is a 501(c) (6) non-profit coalition of associations and businesses in the e-commerce and catalog space known as CiTFAF (Coalition for Internet Tax Freedom and Fairness).
In my opinion, the largest Internet retailer stands to gain the most from a valuation perspective at enactment. Whether you’re invested in a public or private Internet retailer, I believe a good starting place to determine the financial impact to your investments is below:
- Near Term Revenue Dip: Revenue in the sector is expected to fall between 10.0 and 13.0 percent in the short run based on detailed data from one retailer and three earlier studies.
- High Ticket Items Hit Hardest: Revenue may decline more than 13percent for internet retailers with high average ticket orders where the online tax savings have been substantial, and more than offset by freight costs and delivery time (e.g. top-tier consumer electronics and jewelry).
- Collection Cost is Real: The cost of collecting tax (as a percentage of collected tax) will range between 13.5 percent for small retailers to 1.5percent for large retailers.
- Consolidation of Healthy Channel Players: Large strategics likely will accelerate their acquisition of smaller retailers whose margins are the most negatively impacted by the cost of collecting state and local sales taxes.
- Thin and Getting Thinner: Many smaller internet retailers will find it difficult to compete if the new rules are enacted due to their already thin operating margins.
- Valuations Falling: Depending on a host of factors (e.g. magnitude of revenue declines and increased collection costs), we expect valuations of internet retailers to fall by as little as 5 percent and as much as 25 percent.
How does the Marketplace Fairness Act help Amazon?
U.S. Internet retail sales topped $176 billion last year and are expected to reach $279 billion by 2015, according to Forrester Research, Inc.
According to Internet Retailer magazine, Amazon will offer to handle the sales tax collection process for its third-party merchants in exchange for 2.9 percent of the tax collected. This means that Amazon has created a money printing machine.
Amazon's new offer is aimed at hundreds of thousands of independent U.S. businesses, ranging in size from tiny used-book sellers to major manufacturers that sell their products through the Amazon.com site.
Over the past twelve months Amazon has posted revenue of $48.1 billion dollars. Nearly 40 percent of the merchandise sold worldwide by Amazon is by third parties that use the company's Internet platform.
It has been estimated that about half of those sales required Amazon to collect sales taxes or value-added taxes from U.S. and foreign buyers. Under the Marketplace Fairness Act that percentage would grow significantly.
Assuming $279 billion of U.S. Internet retail sales in 2015, Amazon could have $70 billion in revenue running through its platform. Let’s assume 75 percent of that ($52.5 billion) is a target for third-party merchant tax collection fees. Let’s further assume that sales tax is 7.5 percent.
That means by 2015, $116 million dollars of annual revenue (2.9 percent of $4 billion) could end up in Amazon’s checking account as a result of the Marketplace Fairness Act. By 2025 the aggregate amount could exceed one billion dollars.
FOCUS Web-Only Retail Index
Amazon (AMZN), eBay ( EBAY), O.co (also known as Overstock.com) (OSTK), United Online (UNTD), Vistaprint (VPRT), 1-800-Flowers.com (FLWS), Nutrisystem (NTRI), Blue Nile (NILE), U.S. Auto Parts (PRTS), Vitacost (VITC), PedMed Express (PETS), Coastal Contacts (CSOAF.PK), Bluefly (BFLY), and Stamps.com (STMP).
On April 26-27, M&A Europe held its 2012 Spring Convention in Budapest, Hungary. The meeting was hosted by Peter Feher, Managing Director of International Mergers and Acquisitions, Hungary, Ltd.
FOCUS Managing Director Gerald Turner, current Chairman of M&A Europe, delivered the Convention’s keynote address. FOCUS CEO Douglas Rodgers spoke at another session and also was a panel member.
M&A Europe focuses on client cross-border merger and acquisition objectives through Partner cooperation. Delegates from 30+ countries attended the event.
Through M&A Europe, the Partners access an unusual range of strategic buyers, acquisition, and merger candidates, as well as financial partners to increase the likelihood of a successful transaction. Partners in M&A Europe conclude dozens of deals each year in many different business sectors.
In the latest Quarterly, the overall trend in the FOCUS Communications Service Provider Index (CSPI) has been positive. The CSPI gained 1.9 percent in the past twelve months and 6.4 percent in the last three months. However, the sector did lag both the S&P 500 and the NASDAQ. Twelve month and three month returns for the S&P 500 were 6.2 and 10.3 percent, while returns for the NASDAQ in the same time periods were 11.2 percent and 16.7 percent. Download now
Once again the FOCUS Telecom Business Services Index (TBSI) underperformed the broader market indices. During the past year, the TBSI dropped 9.8 percent while the S&P 500 gained 6.2 percent and the NASDAQ added 11.2 percent. Sector multiples also declined. The TBSI revenue multiple fell from 0.3x to 0.2x and the EBITDA multiple dropped from 6.9x to 5.6x. However, the picture has been brighter in the last three months with the TBSI climbing 5.0 percent. Download now
“Many small-business owners are waiting for the day they can cash out and retire. But they'd better do more than just wait,” according to the April 29, 2012 issue of The Wall Street Journal. Veronica Dagher writes:
“Too many owners aren't prepared for the day when they'll need to cash out. Some haven't done their homework to figure out what the business is really worth. Others undermine their company's value with their inability to let go. Advance planning for the sale of a business is more important than ever, given today's economic uncertainty and how portfolios have suffered over the past decade… financial advisers and exit-planning specialists weigh in on some of the most common mistakes business owners make when they're ready to retire, and how those mistakes can be avoided…”
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About FOCUS, LLC
Founded in 1982 in Washington, D.C., FOCUS, LLC provides a range of investment bank services tailored to the needs of middle market businesses and their executives. Today, we are a national firm serving clients from offices in major cities across the United States. FOCUS specializes in serving business units with revenue or transaction sizes between $5 and $300 million, serving entrepreneurs, corporate owners and various types of investors. FOCUS clients include large corporations and private equity firms that engage the firm for middle market transactions.
FOCUS has achieved a very high close rate on accepted buy side, sell side and corporate finance mandates because of the unique resources, process and perspective that we bring to middle market investment banking. FOCUS has developed a systematic, research driven, open and proven transaction process. It is the driving force of our firm and distinguishes us from other investment banks serving the middle market.
With extensive investment banking transaction experiences and a group of seasoned operating and financial executives, our firm provides a unique value proposition. We bring a strong operating perspective, a wealth of practical experience and a unique research and transaction process to our middle market clients. Our knowledgeable resources include seasoned partners managing directors, principals, research staff, internal databases of national and international contacts and deal experience in a range of industry sectors.