Why Acquiring ShipStation Bodes Well for Stamps.com

Earlier this month Stamps.com  (NASDAQ: STMP  ) -- one of three vendors licensed by the United States Postal Service (USPS) to sell postage -- announced it was acquiring ShipStation for $50 million in cash. With this move Stamps.com reduces its dependence on the USPS, something very important for the company's future. This acquisition not only makes sense for Stamps.com, it breathes new life into the company's long-term prospects. 

The USPS is struggling
It is no surprise that the USPS continues to have a difficult time staying afloat. USPS revenue topped out at $74.9 billion in 2007 and has since decreased to $67.3 billion. Total career employees with the USPS have decreased each year since 2004, from 707,485 in 2004 to 489,727 in 2013. Total mail volume through the USPS also peaked at 213.1 billion pieces of mail in 2006, since falling each year to 158.4 billion in 2013. 

Stamps.com's revenue comes primarily through enterprises that ship their products with USPS labels, so Stamps.com's current business model solely relies on a USPS that stays afloat. Despite the revenue challenges of the USPS since 2007, Stamps.com has managed to grow revenue from $85.81 million to $127.82 million in 2013.

In other words, Stamps.com has succeeded in capturing a bigger piece of a shrinking pie. While this can reassure investors that Stamps.com's management team has operated in a competent manner over the past several years, the fact that the company's success is tied, to some degree, to the USPS is not exactly comforting.

Thank goodness for ShipStation 
ShipStation is similar to Stamps.com in many ways. Like Stamps.com, the company has partnerships with major retailing outlets and platforms such as Amazon and eBay, in addition to other outlets such as Bigcommerce and Shopify. However, ShipStation's platform allows vendors to organize and process orders and print postage and shipping labels from a plethora of shipping providers (not just the USPS). ShipStation is integrated with UPS, FedEx, DHL, and -- thanks to Stamps.com -- all USPS postage offerings.  

With the acquisition of ShipStation, Stamps.com is no longer fully dependent on the solvency or operations of the USPS. ShipStation is especially poised to benefit from the continuing expansion of eCommerce and online retail, since the company's platform appeals to any enterprise that ships its products (not just those who use USPS). Put in other words, this acquisition expands Stamps.com's business to other shipping providers and opens the door for global expansion down the road -- two key items that Stamps.com's business model lacked up to this point.

"E-commerce driven package shipping is the fastest growing segment within the mailing and shipping space and this acquisition will allow us to accelerate our growth in this area," says Ken McBride, CEO and chairman of Stamps.com. "The acquisition of ShipStation represents a significant strategic investment in our high volume and e-commerce shipping business." 

Strong financial presence 
Stamps.com has been a free cash flow machine, building up more than $90 million in cash on the balance sheet with no debt. Even after this acquisition, Stamps.com will likely have more than $40 million in cash without a penny of debt when all is said and done. 

The press release announcing the acquisition states "Stamps.com plans for ShipStation to operate as an independent, wholly owned subsidiary, led by the existing management team."

Foolish bottom line
Down the road I wouldn't be surprised to see ShipStation more heavily integrated into Stamps.com's business or even become the primary operation of the company. Time will tell, of course, but the acquisition ensures that Stamps.com's future is no longer completely hinging on the USPS. I think this acquisition is a wise use of Stamps.com's extensive capital and bodes well for patient investors in the business. 

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