Kiva Systems Acquired at a Very Steep Price!

Amazon.com’s acquisition of Kiva Systems keeps coming up in my conversations with industry peers and colleagues. Kiva is a provider of advanced robotic material handling systems — or looked at in an alternative way, the company brought to market much more intelligent Automatic Guided Vehicles (AGVs) than we had seen before. Adrian wrote about the acquisition shortly after it occurred. Now I’d like to add my two cents.

Back in 2009, I wrote a Strategic Report titled “Warehouse 2025” where I talked about how a new generation of more intelligent AGVs and goods-to-man robots would change warehousing. Here is an excerpt:

Robotic solutions offer the prospect of achieving a highly automated warehouse with less risk, based on a more scalable investment path and more process flexibility. These solutions change the way we think about optimization in the warehouse, the way various warehouse processes will be conducted, what types of companies will be willing to invest in highly automated warehouses, and even what a warehouse will look like in the future.

What made me particularly bullish on this new technology was its ROI and risk profile compared to existing forms of high-end automation. I talked to a material handling consultant who had done a warehouse analysis for one of his customers. The analysis looked at using Kiva versus using conveyors with pick-to-light zones and A-Frames for a customer.

The consultant found that the warehouse productivity between the two scenarios would have been almost the same. The cost was also similar.

However, in order to simulate the conveyor scenario, the consultant made five-year assumptions about volume growth and order profiles. He knew that these assumptions could prove to be invalid in just a few years. Further, even if the estimates proved roughly right, for a few years the conveyor automation would have been underutilized. Then for several years the system would have been maximally cost efficient. Then, as volumes grew past the design parameters, there would be a period where labor-intensive workarounds would be needed to handle parameters beyond what the system was designed to do.

In contrast, Kiva scaled. When volumes were lower, you bought just the number of “bots” needed. As volumes grew, you added bots. Kiva was the obvious choice because the risks were so much lower.

Further, the only reason productivity was roughly the same between the two scenarios was because the conveyors were to be used in conjunction with A-Frames. In a conveyor warehouse without automatic dispensers, which do not make sense in many warehouses, the productivity of bots is clearly higher. Automatic dispensers also need to be frequently loaded and require careful planning on an ongoing basis.

Despite being a real fan of this new technology, I was stunned by the acquisition price. Kiva, as a private company, did not report revenues and Amazon did not disclose the company’s revenues either. Nevertheless, my feeling, based on staying periodically in touch with one of the company’s executives, is that Kiva generated about $100 million in revenues. One of my industry peers had a conversation with someone in the investment community who also felt Kiva was about $100 million in revenues. If true, Amazon paid 7 to 8 times revenues for Kiva, which is an extraordinarily high multiple.

Because Amazon is a public company and $775 million will almost certainly be considered “material,” we should eventually know what Kiva’s revenues were at the time of the acquisition. But we may not know until Amazon publishes its 10-K/annual report next January.

Other companies that have come to market with intelligent AGVs, such as Egemin and Seegrid, have to be thrilled. However, they are not quite apple-to-apple comparisons with Kiva. Kiva’s sweet spot is “each picking,” while the other solutions are a better fit for mixed-case pallet building and unmanned full pallet moves.

I concluded my 2009 Strategic Report by saying that “the adoption of new business technologies is often surprisingly slow and it will be many years, if ever, before these emerging robotic solutions obsolete (traditional) warehouse technologies. That is why this Strategy Report is titled, ‘Warehouse 2025.’” That is how long I thought it might take this form of technology to “cross the chasm.” It could happen faster, I felt, if there was some big event that generated lots of publicity and buzz. Amazon’s purchase of Kiva could be that event.

Comments

  1. I think Amazon is valuing Kiva’s potential in a different way. First, Amazon would expect tremendous savings by automating its warehouses – this wouldn’t be reflected in Kiva’s historical sales. Second, if Amazon keeps Kiva’s solutions on the market – or at least second generation versions of the solutions – once Amazon has implemented, the marketing potential would presumably generate more business than Kiva ever could operating alone.

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