Amazon Buys Egghead in Bankruptcy Deal

Amazon.com (Nasdaq: AMZN) said Tuesday it had bought all of the assets of defunct e-tailer Egghead.com through a California bankruptcy court for US$6.1 million.

Amazon submitted the winning bid for Egghead last week, Amazon spokesperson Patty Smith said. By late Tuesday, visitors to the Egghead.com Web site, which has been running though it stopped taking orders in late October, were being re-directed to Amazon's electronics page.

There, a note tells visitors that Egghead and Amazon "are teaming up to make it easier than ever to find the best in computers, electronics, software, and much more. Shop today and check back for the exciting re-launch of Egghead.com."

Privacy Matters

Smith told the E-Commerce Times that "Egghead is a very well-known and well-respected brand, particularly in the Northwest." In fact, Egghead opened its first brick-and-mortar store in Amazon's hometown of Seattle, Washington, in 1984.

"They have a very tech-savvy customer base and we think this is an opportunity to combine the best of what Egghead offered their customers with what Amazon does best, which is offering great selection, value and product information," Smith said.

Despite its financial woes, Egghead continued to record strong sales figures, Smith noted, with $180 million in sales during the first three quarters of 2001.

Data Safe

The purchase includes the Egghead.com domain name and other intellectual property, including Web site data. However, Amazon said it will not use Egghead's customer list, which was guarded by the Menlo Park, California e-tailer's privacy policy requiring that customers give prior consent before having their information used by a third party.

Smith noted that Egghead customers will have to re-enter their information to become registered at Amazon.

"We of course intend to comply with all the commitments in that privacy policy," she added.

Bargain Hunting

The price is a significant discount over the $10 million that Fry's Electronics had offered to pay for the bulk of Egghead's assets in August. However, Egghead could not close that deal and abruptly stopped taking orders on its site on October 25th, despite its earlier pledge to continue operations during its bankruptcy proceedings.

"The price looks pretty reasonable in absolute terms, but $6 million is significant for a company like Amazon," Morningstar.com stock analyst David Kathman told the E-Commerce Times.

Amazon has pledged pro forma operating profits in the current quarter, he noted.

Egging Amazon On

"The bigger question is the future of Amazon's electronics store," Kathman said. While the Egghead deal is aimed at beefing up offerings in that category, Kathman said he remains skeptical that Amazon can succeed in a business where so many pure-play e-tailers, including Egghead, have failed.

"In general Amazon has been very high on electronics, saying it's going to be a great business which will make a lot of money for them. I'm still waiting to be convinced," he said. "Amazon says they can do it better, but so far they're still losing quite a bit of money in that business. I'm going to remain skeptical until they show me that they can make money doing this."

Scrambled Eggs

The Amazon purchase ends a long and strange odyssey for Egghead.

Founded as a traditional retailer of software in 1984 and eventually growing to a chain of 84 stores in malls and urban areas across the U.S., Egghead swore off bricks and mortar to become an Internet pure play in 1998.

The strategy -- which flies directly in the face of the widespread belief held today that a multichannel approach is the most effective way to sell online -- held up for a while. In 1999, Egghead merged with fellow pure-play OnSale.com in a deal said to be worth $400 million at the time.

But 2001 proved to be a fatal year for Egghead. Despite two rounds of layoffs that claimed nearly 250 jobs and the extension of a $20 million line of credit from IBM (NYSE: IBM) Global Financial, Egghead found itself facing delisting from the Nasdaq. Eventually, the e-tailer opted for bankruptcy protection.