Amazon + Kiva: I Think I Finally Get It

I’ve worn a groove in my head from scratching it on last week’s Amazon-Kiva Systems deal.  After reading all the press stating what a crafty move it is and after the huge uptick in Amazon’s (NASDAQ: AMZN) stock price, The Merger Verger feels like the odd man out on this one. [Original posting here]

I still disagree with all the fawning Wall Street analysts and tech-media commentators but I think I have homed in on an explanation.  Let me offer up some facts and then some observations.

Facts:

  1. Jeff Bezos built a spaceship to go to Zebulon or  some place.  (You can look it up.)  The guy clearly has a “boys with toys” problem.  Robots – even ones that look like giant orange throat lozenges skating around a warehouse floor – count as objects of desire. (Earth to Jeff.)
  2. Kiva (founded in 2003) creates leading-edge material handling systems used by an impressive list of customers, including units of Amazon (but not Amazon itself).  It’s privately held but recent revenues were reportedly north of $100 million, making the purchase price of $775 million a bracing 7X multiple of sales. (Yikes.)
  3. Amazon has a long history of successful acquisitions, but all of them of the horizontal type. They have vertical partnerships but their experience in integrating a company whose business fundamentals are entirely different to theirs is basically nil. (Uh-oh.)
  4. The company’s press release about the Kiva acquisition says a big nothing about the rationale behind it and offers only one minor tidbit about the plans for its integration: Kiva’s HQ will remain in Massachusetts.  (Whoopee.)
  5. Equity analysts have settled on the rationale that Kiva robots will bring significant efficiencies to Amazon’s order fulfillment process, which they should.  (At an NPV of minus how much?)
  6. Other analysts have pointed out that the move could be a competitive one, designed to prevent others from having the cost/efficiency advantage associated with the Kiva system, thus enabling Amazon to defend an important advantage. (Come on guys.)
  7. One or two analysts have floated the idea that all those reasons apply but are small beer; the real reason is that Kiva unlocks a door to the next transformational step for Amazon. (Now, ladies and gentlemen, we may be getting somewhere.)

Here’s The Merger Verger’s take on all that:

  1. The absence of any Amazon commentary on the deal’s strategic rationale could be a case of intentional competitive silence but it sure smells like the lack of any meaningful strategy to describe.
  2. On the efficiency explanation, to suggest that the best way to capture the benefit of a key component of your operational infrastructure is to own it outright is just hubris.  By that line of thinking, Amazon should buy a corrugated box manufacturer, UPS should buy a truck maker and Apple should buy, well, China. Metaphorically speaking, there must be some compelling reason to own when you can rent.
  3. As a corollary, one does not pay 7X sales to obtain operational efficiencies; that’s just stupid.  One pays that kind of multiple to launch a sales rocket.
  4. Similarly, to buy a technology company merely to prevent competitors from gaining access to it is a flaccid strategy at best.  Even acknowledging Kiva’s technological superiority, squirreling it away for Amazon’s exclusive internal use merely invites robotics wannabes to fill that void.
  5. Again, one does not pay 7X sales for a company that one intends to prevent others from patronizing. For Amazon to gain an economic return, Kiva must be able to sell its products widely.
  6. So what one DOES pay 7X sales for? One only pays that kind of money to unlock a transformed future.

Amazon is already a world-leading provider of retail fulfillment services, both internally and as a third-party provider for others.  It has the expertise and infrastructure to keep growing this “pick and pack” business.  But Kiva – owning it, not just renting it – could provide the last essential component of the next generation of competitive dominance in the space. By this thesis, the facilities and operational expertise that already exist at Amazon get combined with a future-pathway technology to create a logistics service that is domain leading and defensible. That makes sense to me.

Ironically, if my analysis is right (not just boys-with-toys, not just hubris, not merely operational efficiency, not competitive paranoia) Amazon has some gigantic integration challenges ahead of it.  But I wouldn’t bet against them.

Information on Kiva:

Click here for the company’s website and here for a series of videos showing the system in action. Click here for an amusing robotic interpretation of the Nutcracker Suite entitled “The Dance of the Bots.”

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6 thoughts on “Amazon + Kiva: I Think I Finally Get It

  1. Pingback: Is Amazon / Kiva another [Buyer] / [Seller]? | The Merger Verger

  2. I sort of hate to step in here, but I believe that you are missing the boat on this, so to speak. Kiva is much more powerful than most laymen realize. Everybody tends to zero in on the robots. The robots are nothing, and basically meaningless to Kiva. The real deal about Kiva is the “Software” and the “Algorithms”. They are epic, and are many years ahead of our time. Amazon sees the future much further than you have imagined.
    How about running UPS and FedEx trucks off of the road? How about delivering both “people and packages” faster and more efficiently than anyone could imagine now? I’m talking people delivery “door to door” without cars, buses, or trains. We are talking “people, packages, and MAIL”. So please, when thinking about Amazon and Kiva, forget the little robots. Any mickey mouse machine shop can put the robots together. Forget the robots, they do not figure into the picture at all.

    • John: Thanks for shedding some light on the intent behind this situation. Why was that kind of clarity and succinctness not a part of the original announcements by Amazon? I presume that you are not divulging confidences so why the previous silence? Have the equity analysts been left concluding – as so many of them seemed to do – that the intent was operational efficiency?

      As I said in my posting, I did not buy that explanation and your comments reinforce the conclusions that I was left to draw: that the deal was predicated on Kiva bringing a “future pathway technology” that opened some entirely new dimension for Amazon. That is good news. The bad news is that these kinds of deals are very difficult to bring off (hence the eBay/Skype amused comparison). And the choice not to articulate clearly and loudly the strategic intent looks – to an integration guy – like step #1 is already misstep #1. Let’s hope not. The technology sounds very cool. – Doug

      • Doug: Silence is Golden. Most of the equity analysts did a great job on the Amazon / Kiva bond. They understood that operational efficiency is most always a plus for the here and now. Not pumping out all of the possibilities was a very smart move by Amazon. They let us do some of our own thinking. Take GE Appliances for example. Back in the very early 1970’s, GE rocked the home appliance industry by introducing a “Plastic Lined Dish Washer”. Upon their introduction, they were basically 8 years ahead of the pack. Competitors were extremely quick to condemn the “plastic”, even displaying a “burning interior” of a GE Dish Washer on commercial TV, all the while they were feverishly trying to produce their own plastic lined dish washers. Of course, during the negative advertising, GE could not make enough of the product because the public recognized the beauty of it. GE did not warn the industry of their quiet work, they just solved the myriad problems and produced it. Amazon is currently that quiet about Kiva. It is not the robots, but the software and algorithms and the
        expertise of Kiva.

        With the danger of being long-winded let us look at the here and now of this bond with Kiva. Operational efficiency? With the Kiva implementations, order fulfillment efficiency will go through the roof. I can fairly say that currently in the fulfillment industry, there is no way to compete with any Kiva implementation. Can Kiva do everything? No, but it can do plenty and can be modified slightly to accommodate most anything in fulfillment’s. Forget all the photos / video of the little orange robots. The robots (I hate that word) can be built to accommodate picking even Jet Engines, or Trucks, or almost whatever else you can think of. Think about this: Super Efficient warehouses with 6 or 8 floors of product with no people, except on the ground floor. Yes you can with Kiva.

        Amazon made a fantastic move with Kiva. I have to give credit to some people within Amazon for being able to see their future with Kiva. They obviously had some people who saw it for what it is and for what it will become and were able to act on it. The time is coming when UPS and FedEx among others, in a clear state of retrocognition, will rue the day that Amazon snapped up Kiva. They will soon be seeing that their hesitation has cost them their futures. John

      • John: Great points. Clearly the communication of strategic intent must be channeled firts at the leaders and troops of the acquired company, giving them the “juice” to continuing breaking new ground. Sensing that you fall into one of those categories, I can see that Amazon has done that. Next comes the tricky balance of over- versus under-managing the acquired company in the integration process. Here is where history offers a pessimistic pattern. But history also suggests that betting against Jeff Bezos is a stupid thing to do. So I look forward to what happens here. Drop back again or write me if you’d be willing to share the practicum of how the integration shapes up – good or bad – over time. Use doug [at] douglasyorke dotcom. Thanks again.
        PS: no one ever need apologize to me for their being long winded!

  3. Pingback: Amazon Has Hired 15,000 Wall-E Roomba Robots | Digital Trends

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