Neil Patel

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eCommerce M&A consolidation is reshaping the business landscape thanks to its dynamic growth and innovation. The possibility of capturing global markets has opened up new avenues for profits and an extensive cross-border customer base.

Companies looking to expand their market presence, overtake the competition, and add to their product portfolios are leveraging strategic M&As. eCommerce capabilities act as drivers for growing mergers and acquisitions, with the reverse also being true.

M&A activities work to promote eCommerce by providing opportunities to dealmakers on both sides of the negotiation table. Trends and market dynamics in the last few years are indicating how tech developments are spurring transformative deals. Let’s check out these statistics.

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eCommerce M&A Consolidation Trends

The pandemic lockdowns resulted in an upsurge in demand for eCommerce facilities, with customers relying entirely on online shopping. Although the first quarter of 2020 was unpredictable and shaky, the second quarter saw a market resurgence in M&A deals.

Statistics indicate that there was an 18.16% growth in 2020, and more than 28,500 transactions were announced. This acceleration continued through 2023, and experts estimate that the M&A uptrend will continue in the next few years.

By the second quarter of 2023, M&As in 59 verticals marked a 20.4% year-over-year growth. Strategic acquisitions dominate the trend, with acquirers focusing on buying brands with high-grade product ranges and an established customer base.

Companies with lower customer acquisition costs and high long-term value are also attracting buyer interest. Such acquirers account for 71.2% of total number of M&A deals, with private equities buying 45.8% of the target businesses.

These transactions have robust support from the fundraising. Through the second quarter of 2023, dealmakers raised close to $16.2B worth of capital. Of these, eCommerce accounted for $3B worth of deals across 12 financial services.

Interestingly, financing availability has slowed because of rising interest rates and debt costs. While lenders are looking for more restrictive debt covenants, they are open to funding eCommerce M&A consolidation. The stress is on acquiring distressed businesses and firms facing financial hurdles.

These trends in M&A deals are consistent across all spaces. And that includes B2C and B2B retail, manufacturing, and distribution brands. M&A activity in the eCommerce segment has also seen growth since businesses are displaying impressive near and mid-term performance and valuations.

Consumer Demand Has Spurred eCommerce Growth

The eCommerce sector has noticed rapid growth in the last five years or so, but the 2020 pandemic boosted sales. Stay-at-home orders and remote working norms resulted in consumer purchasing behavior trending toward online shopping.

Technological advancements with secure payment portals, business data management, and internet connectivity have boosted sales. Instant information and communication exchanges, AR, VR, and Artificial Intelligence have changed how consumers interact with products and make decisions.

Although inflation rates are high and economic uncertainty persists, consumers continue with their online spending. Statistics indicate that online sales now account for 15.1% of aggregated retail sales. eCommerce sales have risen by 7.8% from the first quarter of 2023 to $272.6 billion in Q2.

These consistent purchasing habits have essentially offset the onset of the anticipated recession. Despite rising prices and interest rates, consumers continue to rely on eCommerce for their needs.

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Factors Influencing eCommerce M&A Consolidation

The number of M&A transactions is rising rapidly, with dealmakers recognizing the potential benefits. However, deals in the eCommerce sector come with unique challenges that buyers and sellers need to prepare for. Here’s an overview of the key benefits and hurdles they face.

Hurdle – RMA (Return Merchandise Allowances)

One of the biggest downsides of eCommerce is Return Merchandise Allowances (RMA). As a rule, customers are 30% more likely to return merchandise to an online store than 8.89% in a physical retail store. These windows vary according to the brand and sector.

For instance, Amazon has a 30-day window, while Costco offers customers a 90-day allowance for returning products. Although this facility gives brands an edge over the competition and boosts sales, it can influence the seller’s company’s financials.

Incomplete and inconsistent financial metrics can impact the company’s valuation and lead to delays in the deal’s closing. Predicting the volume of returns based on the product portfolio and previous performance is almost impossible.

These factors can add to the challenges of due diligence and the pricing structure sellers can expect. From the experienced acquirer’s perspective, they are well aware of the importance of RMAs and how they impact revenues.

Working out the infrastructure to accommodate returns, calculating chargebacks, and maintaining terms and conditions are critical nuances of eCommerce retailing. Since every brand has a unique USP to attract and retain customers, acquirers will have to negotiate sale terms accordingly. And, that influences the eCommerce M&A consolidation process.

Benefit – Capitalizing Research and Development Costs

eCommerce companies have been undertaking and investing in extensive research and development to cope with changing purchasing trends. The R&A can be for building or acquiring software and API to provide services to their online customers.

Many companies have also developed AI, automation, and robotic processes to improve efficiency and streamline and speed up their operations. Any in-house Intellectual Property they have developed now factors into their valuation for eCommerce M&A consolidation.

The expenses incurred for research and development include supplies, equipment, wages, and fees to third-party contractors for their services. Enterprise-level, small, and medium-sized businesses can claim a federal R&D tax credit or Credit for Increasing Research Activities.

This is a dollar-for-dollar offset of income tax liability, which adds up to 7% to 10% of R&D costs. The expense for integrating secure payment portals, hiring remote workers, and building cyber security firewalls also feature in the financials. Sellers can, thus, command a higher price for the company.

From the acquirer’s perspective, in-house developed IPs are valuable assets that they would pay a premium for. Not only will the targeted company have complete and unencumbered rights on the IP, but it will also likely have security.

Technology-driven companies are highly in demand for mergers, and eCommerce firms top the list. Buyers are always looking for opportunities where they can Pro-forma the company’s performance with the assurance of projected cash flows.

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Hurdle – Logistics and Freight Charges

eCommerce has effectively raised the demand for faster delivery. Customers expect short delivery times, which has resulted in the logistics sector ramping up technological advancements. That’s the only way they can keep up with the increasing demand.

Companies must also streamline and scale their internal structures with digital proformas. They must also account for more expensive freight and logistics that impact their bottom lines. And, in turn, the profit margins, performance, and valuation during the eCommerce M&A consolidation procedure.

In 2022 alone, the logistics network costs in the US grew by 19.6% to a record $2.3T.  Warehousing, delivery, and handling charges are also rising since the activities are closely interlinked and don’t operate independently. Sellers may also factor in one-time setup fees in their valuation.

On their part, acquirers may be open to accepting the deductions and addbacks in the valuation of the targeted company. They may also include any one-time adjustments sellers may have had to make to cope with the pandemic sales.

Negotiations for the final purchase price may account for these expenses and costs.

Benefit – Innovative Products in the Portfolio

eCommerce companies can successfully launch a broader portfolio of products and services to cater to a much larger customer base. To promote this product range, they’ll invest in aggressive marketing and advertising strategies. These costs may be one-time expenses for an impactful launch.

Once the product builds a market presence, it will continue to generate profits without additional promotions. Sellers now add this one-time expense to their valuation as a revenue-generating asset that enhances performance and growth.

eCommerce M&A consolidation negotiations account for rapid evolution in the sphere with in-depth evaluations and adjustments. Innovative product categories, including digital offerings, supply chain challenges, and unique end customers, underscore how dealmakers negotiate M&A transactions.

Acquisitions in the eCommerce sphere can also be about expanding into other sectors and building a more robust market presence. Deals like these allow acquirers to edge out the competition and build economies of scale.

A good example is Amazon’s acquisition of Whole Foods, which allowed the eCommerce giant to expand into the grocery vertical.

Hurdle – Sales Tax Dues

Keeping up with sales tax obligations is challenging enough for traditional brick-and-mortar stores. Dealing with sales tax collections and remitting to the government can become more complicated for eCommerce stores.

The failure to collect and deposit taxes can lead to negative audit findings, which can result in interest and penalties. These dues can potentially cripple a company. eCommerce stores need to integrate the tax collection process into their billing procedures.

Ensuring that automated online bills calculate and add taxes is crucial. Companies must incorporate these capabilities even as they are working on other aspects of business operations. Remember that sales tax can be featured not just in merchandise sales but also asset sales.

Further, eCommerce companies must comply with the regulations of the state where they operate. And also the state where their customers are located. Different states have also set up sales volume thresholds that determine the business’ tax liability.

Sales tax dues are an important consideration during M&A due diligence, and dealmakers have expert CPAs on board, too. Their job is to scrutinize the tax records to identify any lapses that can cause problems later. Accordingly, they may request holdbacks and escrow while these issues are sorted.

These tax-related issues may include owed retroactive taxes and applicable dues depending on the product category and customer base. And are a crucial aspect of eCommerce M&A consolidation.

Benefit/Hurdle – Expansion into Global Markets

eCommerce M&A consolidation is an effective strategy for expanding into cross-border markets. Acquiring a company that has an established customer base and presence in a local market allows buyers a smooth entry.

Acquirers need not navigate regulatory compliances, break cultural barriers, or work out logistics. At the same time, they must factor in the duties and import taxes customers must pay for purchasing products and services.

Sellers must add Harmonized Item Description and Coding System (HS) codes and country of origin to their products. They must also collect the dues along with customs fees per international shipping agreements at checkout.

Before acquiring a company with a global market presence, buyers must ensure that the target has complied with these requirements. They must also ensure that it has the necessary infrastructure to navigate the regulations.

eCommerce M&A Consolidation Outlook

Shifting customer buying behaviors have spurred technological advancements, and companies are working to adapt quickly to the changing business landscape. Moving forward, while consumers continue to rely on online shopping, sustainability and ethical considerations are also emerging as decision-defining factors.

The eCommerce sector continues to navigate the challenges of rising freight costs and demands for quick delivery. Issues like offering RMA facilities while maintaining that edge over the competition and revenues and profits are key hurdles.

Companies are not only working on countering the challenges but are also developing innovative technologies. Augmented Reality (AR), Virtual Reality (VR), Artificial Intelligence, and automation help improve and enhance the customer buying experience.

eCommerce M&A consolidation is an effective strategy to build an entire ecosystem that facilitates Internet shopping. Dealmakers are entering into horizontal and vertical collaborations to improve their supply chains and product portfolio.

Now, they are also looking for opportunities to enhance cybersecurity, software applications, and advanced payment systems. Customer Management Systems (CMS), advertising and marketing approaches, social media marketing, and other applications are poised to take eCommerce to an entirely new level.

And eCommerce M&A consolidation is a step in the right direction.

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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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