Kozmo in Talks to Acquire Urbanfetch

NEW YORK (08/15/2000) - Online delivery pioneer Kozmo.com is in discussions to acquire archrival Urbanfetch.com, a sign that instant gratification doesn't guarantee instant success for everyone.

The agreement could be completed as early as next week, according to individuals familiar with the talks.

The acquisition would help Kozmo eliminate a year-old thorn in its side. It could also bring Kozmo thousands of new customers who are served by New York-based Urbanfetch.

CS First Boston is handling the deal for Kozmo.

Valuations for the two closely held companies are difficult to pinpoint. Early this year, Amazon.com (AMZN) acquired a minority stake in Kozmo for $60 million, but that was before the market correction in April. Urbanfetch is far smaller than Kozmo, currently operating only in New York and London. Kozmo, by contrast, is in 11 markets, including New York and Los Angeles. On Thursday, Kozmo announced that it would lay off 275 employees, about 10 percent of its workforce, in an effort to streamline operations.

More layoffs could follow. With two competing businesses like this, the back-office efficiencies are obvious. "It is certainly likely that there will be some layoffs as they combine the two entities," says one analyst with knowledge of the talks.

One particularly attractive property, however, is Urbanfetch's recently launched London location. While Kozmo has mulled plans to expand into Europe and Asia, it has scaled back those plans following the market tumble.

Urbanfetch's London operations may actually help Kozmo gain a toehold in Europe.

Urbanfetch CEO Ross Stevens' role is uncertain. One source says Stevens may have no position in the combined entity.

Urbanfetch did not return calls to comment.

Kozmo spokesman Michael Gordon declined to comment on the deal. "Our company policy is not to comment on rumors."

The two companies have a history of animosity. Kozmo sued Urbanfetch late last year, charging the competitor with copying its business model verbatim.

According to court filings, Stevens, posing as a potential investor, "misappropriated" confidential business information from Kozmo in the spring of 1999. At the time, Stevens was CEO of hedge fund Integrity Capital Management.

Urbanfetch responded with a counter-suit, asking for an estimated $60 million in compensatory and punitive damages. Urbanfetch said that Kozmo's suit hindered it from gaining financing from potential investors.

The suit was settled out of court in November. Details of those proceedings were never made public.

Legal wrangling aside, Kozmo - once an e-commerce media darling - has seen its image tarnished as Wall Street has lost patience with e-commerce ventures. In June, it laid off 24 employees to cut an estimated $2 million in costs. Despite stating in June that no more layoffs were planned, the company later shaved off an additional 275 employees and closed down two warehouses in Los Angeles.

"We feel we have the workforce in place to efficiently grow the company," Gordon says of the recent round of layoffs. "But every growth company regularly reviews its workforce to make sure it is operating efficiently."

In August, Kozmo founders Joseph Park and Yong Kang stepped down, along with the company's chief marketing officer and CTO.

A deal would indicate ongoing consolidation in the "last-mile delivery" business. Merger talks come a month and a half after grocery-delivery giant Webvan purchased HomeGrocer for $1.2 billion. People familiar with the talks say that before the Webvan deal, HomeGrocer had approached Kozmo, but the talks had stalled.

In the months leading up to the current deal, both Kozmo and Urbanfetch have struggled. The market has begun to scrutinize dot-com companies whose bottom lines continue to plunge. In the struggle to cut costs, Urbanfetch has slashed its marketing budget by 70 percent and has imposed an order minimum of $10 per order. Kozmo, by contrast, requires a $5 minimum.

Stevens told Business Week last month that his company would reach profitability by next year. Kozmo insiders had previously said the company would be profitable by the first half of 2002.

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