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Webvan + HomeGrocer.com: No More Food Fights?

In early April, I wrote about Webvan in an article entitled "Webvan: Top of the Food Chain". The stock was at $7 and rallied. Unfortunately, yesterday the stock fell back (down $1.41 to $7.31).

It was kind of odd. If anything, yesterday's news should validate the statement of Webvan being at the "top of the food chain." You see, the company agreed to purchase its arch nemesis, HomeGrocer.com

Let's get some background: Webvan is the brainchild of Louis Borders, who was the founder of Borders Books. He is known for developing advanced information and inventory systems (he is actually a mathematician by training). The CEO, George Shaheen, is also a logistics pro. Prior to joining Webvan, he was the CEO of Andersen Consulting.

What Borders was able to accomplish was a new-breed distribution system. Webvan consists of a variety of huge cutting-edge warehouses, which are climate-controlled to maintain the proper humidity, light levels and temperature (that is, the warehouses can have perishable items). Products are then delivered via sophisticated vans to customers.

Now lets take a look at the deal: Webvan will use its stock to purchase HomeGrocer.com for about $1.2 billion in stock. The combined entity will be called Webvan Group. Louis Borders will remain as chairman and George Shaheen will continue as CEO. Jim Barkesdale will be added to the board. Other board members include: David Beirne, Benchmark Capital; Michael Moritz, Sequoia Capital; Christos M. Cotsakos, chairman and CEO of E*Trade; and Tim Koogle, chairman and CEO of Yahoo!.

With the funding environment becoming increasingly difficult, it makes sense for companies to combine. After all, do we need really need several national distribution systems?

The deal looks like a tremendous fit. The companies can rationalize their marketing expenditures, as well as R&D and operations.

Moreover, the deal will expand the market reach of Webvan Group. By the end of 2000, the market reach will be 13 metropolitan areas. Interestingly enough, there was no overlap in terms of coverage areas between Webvan and HomeGrocer.com.

The deal also means much less competition. In fact, there might even be a potential alliance with Amazon.com. You see, Amazon.com owns 22 percent of HomeGrocer.

As was learned last year, critical to e-commerce is fulfillment. If not, there are lost customers and sales. Unfortunately, most e-commerce companies do not control fulfillment, but are at the mercy of others. This is a not a problem with the Webvan Group. The company bills itself as the "Last Mile" Internet retailer. In other words, Webvan is becoming a critical link in the e-commerce infrastructure.