Amazon.com (AMZN 3.43%) still plans to acquire home robotics specialist iRobot (IRBT 13.15%) -- but the premium the online retail giant is willing to pay just fell significantly.
Earlier this week, shares of iRobot plunged after Amazon announced the two companies have agreed to amend the terms of their merger to reduce the price Amazon will pay -- specifically, to $51.75 per share from $61 per share previously.
Why the price reduction?
If you're wondering why the price was lowered, look no further than iRobot's move to enter into a new $200 million financing facility to both pay off its existing debt and help fund its ongoing operations until the merger is completed. For Amazon, it's essentially a zero-sum game as the change in price per share largely reflects the planned increase in iRobot's net debt under this new financing facility.
But why did iRobot need those funds in the first place? It was, after all, a reasonably profitable business growing at a healthy clip in the quarters leading up to the $1.7 billion merger announcement almost a year ago.
I think the answer lies in the fact that this merger has taken much longer than expected to complete amid antitrust reviews from not only United States regulators, but also regulatory bodies in the U.K. (which were concluded in June) and the European Commission.
Meanwhile, iRobot Chairman and CEO Colin Angle reiterated this week that the company is experiencing a "hyper-competitive environment" for its home robotics niche. Indeed, there's no shortage of copycat robotic vacuum cleaners attempting to usurp iRobot's position as the market leader.
Further compounding the effects of that hyper-competitive environment, iRobot has significantly reduced its own sales and marketing spend as it awaits the completion of the merger. In turn, this has caused an enormous decline in revenue and a drastic loss of operating leverage.
Last quarter, for example, iRobot announced it had reduced selling and marketing expenses by 27% year over year to $44.8 million, fueling a 45% year-over-year decline in revenue to $160.3 million. That translated to a quarterly net loss of $81.1 million, or $2.95 per share, compared to a much narrower net loss of $1.12 per share in the same year-ago period.
As a result, iRobot's cash and cash equivalents had dwindled to around $48 million at the halfway point of this year, down from $118 million a year earlier. This created an urgent need for cash as it awaits the completion of its acquisition.
Amazon still focusing on the bigger picture
Amazon still has its sights set on its overarching goal of -- in the words of Dave Limp, SVP of Amazon Devices -- working with iRobot "to invest in ways that make customers' lives easier and more enjoyable."
At the same time, that's likely a massive oversimplification of Amazon's home robotics ambitions. It also helps that iRobot possesses a unique front-row seat to an arguably unrivaled cache of in-home data that no other company could provide -- namely, through the cutting-edge home-mapping technology of its latest Braava and Roomba floor sweeping, mopping, and vacuuming robots.
I argued as much when I suggested several years ago that fellow tech giant and Google parent Alphabet would do well to acquire iRobot itself. At the time, iRobot had just announced a new partnership with the Google Assistant teams, saying the two companies would "seek additional ways to integrate their platforms, providing customers with [...] new innovative smart home experiences that leverage a broader understanding of the home's space," including ways to "help simplify smart home setup and enable powerful new automations."
Amazon, of course, beat Google to the punch by striking a deal with iRobot last year. From its millions of Alexa-enabled Echo smart speakers to its previous $1 billion acquisition of video doorbell leader Ring in 2018, Amazon is most likely champing at the bit to further integrate iRobot's home robotics offerings into its own budding smart-home-product portfolio.
There's also the possibility that the price could fall even further if regulators drag the process out long enough for iRobot to exhaust its new financing facility. While iRobot investors waiting for that original $61/share price to materialize were disappointed by the news -- Amazon's impending takeover probably still represents a best-case scenario for both businesses.
