It’s been a week since Shopify (NYSE:SHOP) announced the acquisition of Massachusetts-based fulfillment specialist 6 River Systems Inc. for $450 million. The move did little to move SHOP stock higher.
However, if I were a 6 River shareholder, I would hold on to my Shopify stock. Here’s why.
A Talented Acquisition
Some acquisitions are made to acquire revenues. Others are done to obtain a particular product or service, and some are made to acquire talent. In the case of 6 River, Shopify made the acquisition primarily for the third reason with a little of the second reason thrown in for good measure.
6 River is expected to generate $30 million in revenue in 2020. Shopify generated 12 times that amount in the second quarter alone. It didn’t buy the Massachusetts company for its revenue.
As for the second reason: to acquire a product or service, there is no doubt that 6 River’s cloud-based software and mobile robots (known as Chuck) played a part in Shopify’s interest in the company. After all, Shopify’s promised to spend $1 billion to build a fulfillment network in the U.S. that can keep up with Amazon (NASDAQ:AMZN). 6 River operates more than 20 facilities in the U.S., Canada and Europe, fulfilling orders for a lot of major corporations.
So, yes, the second reason for making acquisitions applies.
However, it is the three co-founders of 6 River, two of whom worked for Kiva Systems (Amazon Robotics), that provides Shopify with the greatest opportunity to match the logistics and fulfillment capabilities of its rival quickly.
Sure, the software and robotics are important, but if it didn’t get this expertise from 6 River, it likely would have found another robotics firm to fill its need.
6 River brings a management team to the table that can head up Shopify’s $1 billion plan to grow its fulfillment network. It’s got the people, the product, and the expertise to woo customers of all sizes.
Vertical integration is what Shopify is after and this acquisition gets it one step closer.
It Was Smart to Include SHOP Stock in Deal
The $450 million acquisition, which is expected to close in the fourth quarter, is to be paid 60% in cash and 40% in Shopify Class A subordinate voting shares.
6 River shareholders will get $180 million in stock, $69 million (including options) of which will go to the company’s three founders and its other employees. The rest to its venture capital investors.
Based on its Sept. 9 closing price of $358.67, 6 River’s stakeholders will receive approximately 502,000 Shopify Class A subordinate voting shares.
Chances are good 6 River’s VC investors will sell their shares as soon as it makes sense to generate a return for their own investors. That said, if their initial investment was in 2016 when 6 River was founded, they’re still only four years in. Holding on to SHOP stock for a year or two might not be the worst thing in the world.
However, the founders and employees absolutely ought to hang onto their stock indefinitely, because it is their work over the next 12-24 months that will determine the future trajectory of Shopify’s market cap and enterprise value.
“Shopify is taking on fulfillment the same way we’ve approached other commerce challenges, by bringing together the best technology to help everyone compete,” Tobi Lütke, CEO of Shopify, said in its press release announcing the acquisition. “With 6 River Systems, we will bring technology and operational efficiencies to companies of all sizes around the world.”
With the technology and talent in-house to take Shopify’s fulfillment to the next level, you can be sure this experienced team will quickly spend the billion dollars.
The Bottom Line on SHOP Stock
Trading at 29 times sales, I’m sure a lot of experts, including some at InvestorPlace, would recommend selling at this point in Shopify’s growth.
I’m not one of them.
Most acquisitions fail because they’re done for the wrong reasons. Tobi Lütke and the rest of his management team seem to understand the value of 6 River’s founders.
In 3-5 years, $450 million will appear to have been a very reasonable price to pay to deliver top-notch fulfillment talent.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
