Ebay-Gsic

* Question 2 According to the financial report of GSI Commerce Inc. in Fiscal 2011, before the completion of acquisition by eBay, the revenue for the first quarter has rose 18.7% to $323.5 million ended April 2, which is up from $272.6 million in the year-earlier period (Paul, 2011). Also for the year ended 2010, GSI Commerce quickly developed and showed a 35% increase in revenue comparing to the previous year. It is a promising company and the services provided by GSI Commerce have become popular, especially when large brands want to get rid of online single independent platform. Therefore, revenue is never a problem for GSI commerce. However, net profit showed totally different pictures. The figure below shows the profit and loss for GSI Commerce over 5 years from 2005 to 2010. (Eburn, 2013) It can be found out that the expenses in 2005 and 2007 were just offset by its income and the income positions were negative from 2008 to 2010. The main reason for its increasing revenue but decreasing profit is that the cost for GSI’s services are extremely high, resulting a low gross profit margin. Although the GSI has pushed down its operating expenses as little as possible, it has still posted losses in all but two of its fiscal years since 2001 (WSJ, 2011). Also for a company neck-deep in the retail business, it is not surprising that roughly 40% of GSI’s annual net profit is generated in the last three months of the year because of the seasonal sales in Christmas and GSI has said it has not been profitable in any of its quarters other than the fourth quarters. Another reason that makes GSI so vulnerable is that GSI heavily rely on borrowing from financial market to maintain the normal operations. Rapid growth accelerate the needs for capital, but the long-term deficits, increasing long-term bank borrowing and limited funds available for working capital were prompting investors to increase their risk expectations for GSI. Therefore, it becomes harder for GSI to raise capital by borrowing which normally with higher interest rates, and results a further increase in its operating burden. The chart below shows the change of stock price before the completion of acquisition by eBay. (ADVFN, 2013) It can be seen from the chart that the stock price of GSI Commerce kept increasing since 2008, that may probably due to the promising prospect of its popularity of GSI’s services and its growth revenue. However, from the mid-year of 2009, the stock price began to decrease until eBay announced to acquire it. The potential reason except for its increasing borrowing is that GSI Commerce largely relied on its customers. GSI’s target customers are big brands with deep pockets. They always tend to self-build e-commerce operations and cast off GSI after taking on the road by GSI. Before the takeover, 50% of the GSI’s income was generated from its five major customers (Shawn, 2011). It would be a big impact on GSI if one customer terminate corporation with GSI due to uncontrollable factors such as management changes. Therefore, rely on a few customer basis is not stable, especially that GSI revenue are from services fees. Although GSI itself has a successful and bright future, it would not reflect in its stock price and would not enhance its performance unless it can find a strong financial backing and a way to provide more customers in GSI’s business. When looking at the specific financial performance for the first quarter of 2011 just before eBay completed its acquisition for GSI Commerce in June 20, 2011, GSI Commerce suffered a significant loss in first quarter 2011. On its report, net loss and loss from operation are nearly doubled and over twice respectively, compared with the same period earlier year. On GSI Commerce fiscal 2011 first quarter operating results, which released in April 28, 2011, GIS stated net loss was $13.6 million or $0.2 per share, compared with $8.1 million or $0.13 per share of the same period 2010. However, GSI pointed loss from operations was $27.9 million including $7.3 million on pending acquisition required by eBay. On its financial report, GSI defined acquisition related expenses include ‘transaction, due diligence and integration expenses, non-cash inventory valuation adjustment, and the cash portion of any acquisition earn-out payments recorded as compensation expense’ (GSI Commerce Fiscal 2010, 2011). Therefore, in total $14.1 million loss related with acquisition, besides $7.3 million referring to eBay, $3.5 million out flowed to its acquisition to Fanatics, Inc. in March 15, 2011 and the rest $3.3 million of earn-out expenses related to the acquisition of Fetchback, Inc conducted in June 01, 2010. (GSI Commerce Fiscal 2011, 2011) Consequently, due to a series of acquisition actions, GSI Commerce sinks into financial difficulty in first quarter 2011. In addition, on the GSI Commerce 1st quarter 2011 operating report, the loss of Rue La La and ShopRunner reached nearly 4 times of last year $1.2 million loss. (GSI Commerce Fiscal 2011, 2011) To ensure up going profit after merger, eBay on its acquisition plan also pointed that divesture of 100% of GSI’s licensed sports merchandise business and 70% of ShopRunner and Rue La La, which are not considered as core businesses of GSI Commerce, will be required these transactions must complete at the same day of merger with GSI Commerce. (Business Wire, 2011) As a result, those unprofitable assets will be sold to former CEO of GSI Commerce. * Question 1.1 Nature of two companies Global Sports In. Commerce (GSIC) is located in King of Prussia, PA, United Stated and established in 1995. Originally, GSI only focus on selling sporting items. From 1999, GSI enters into e-commerce area. Before it becomes eBay Enterprise, GSI Commerce is a global leading company, which provides e-commerce outsourcing or business-to-customer (b2c) service to customers planning to build online presences. GSI’s core businesses are global e-commerce, global marketing service and customer engagement. In addition, its e-commerce services including technology, order management, payment processing, fulfillment and customer care. It has over 500 clients and most of them are famous brands including Levi’s, CK and eToys. (Wikinvest, 2007) EBay Inc. is a multinational internet customer-to-customer (c2c) corporate. Its three core business includes auctions, payments and communications. Different from traditional e-commerce company, eBay only provide technology platforms and tools for connecting sellers and buyer but doesn’t have inventory. * Reference Wikinvest, 2007, GSI Commerce Analysis, viewed on 01/09/2013 http://www.wikinvest.com/stock/GSI_Commerce_(GSIC) Business Wire, 2011, eBay Inc. to Acquire GSI Commerce, Viewed on 01/09/2013 http://www.businesswire.com/news/home/20110328006021/en/eBay-Acquire-GSI-Commerce Paul, D 2011, Q1 revenue at GSI Commerce rises nearly 19%, Internetretailer, viewed on 06/09/2013 http://www.internetretailer.com/2011/04/29/q1-revenue-gsi-commerce-rises-nearly-19 WSJ, 2011, eBay’s New Deal: What Is GSI Commerce', WSJ, viewed on 06/09/2013 http://blogs.wsj.com/deals/2011/03/28/ebays-new-deal-what-is-gsi-commerce/ Shawn, W 2013, GSI Commerce, Wikinvest, viewed on 06/09/2013 http://www.wikinvest.com/stock/GSI_Commerce_(GSIC) Ebrun, 2013, why eBay wants to acquire GSI Commerce, Ebrun, viewed on 06/09/2013 http://news.eguan.cn/dianshangyetai_153848.html ADVFN, 2013, GSIC Stock Chart, ADVFN, viewed on 06/09/2013 http://www.advfn.com/nasdaq/StockChart.asp'stockchart=GSIC GSI Commerce Fiscal 2010, 2011, GSI Commerce Reports Fiscal 2010 Year and Fourth Quarter Operating Results, viewed on 03/09/2013 http://www.ebayenterprise.com/news_events/news_releases/gsi_commerce_reports_fiscal_2010_year_and_fourth_quarter_operating_results/ GSI Commerce Fiscal 2011, 2011, GSI Commerce Reports Fiscal 2011 First Quarter Operating Results, viewed on 03/09/2013 http://www.ebayenterprise.com/news_events/news_releases/gsi_commerce_reports_fiscal_2011_first_quarter_operating_results/ Business Wire, 2011, eBay Inc. And GSI Commerce Announce Settlement of Claims Regarding Proposed Acquisition, viewed on 05/09/2013 http://www.thestreet.com/story/11150782/1/ebay-inc-and-gsi-commerce-announce-settlement-of-claims-regarding-proposed-acquisition.html