Smart Thinking: Zany Brainy Buys Its Namesake Website

Educational toys marketer Zany Brainy was really using its noggin at the end of the past year: It decided to fully acquire its namesake Website business,

The King of Prussia, PA-based multichannel marketer announced on Dec. 4 that it has ended its Internet joint venture with Online Retail Partners, a New York-based e-commerce development company that had an approximately 45% stake in Zany Brainy intends to combine its Website with its catalog operations to create an integrated direct division, says chief financial officer Robert A. Helpert.

“Both companies came to the conclusion that Zany Brainy would be better served if it took complete ownership of its dot-com business,” Helpert says. Zany Brainy partnered with Online Retail Partners, from which it received funding of $20 million in capital to form, in late 1999.

The two companies will maintain a working relationship, with Online Retail Partners continuing to host and provide maintenance services for Zany Brainy exchanged Online Retail Partners’ interest in for 1.25 million new shares of Zany Brainy common stock, and a five-year warrant to purchase an additional 1 million shares at a conversion price of $6 a share. Zany Brainy will pay Online Retail Partners $1 million pursuant to the terms of the transaction documents. “In addition, there were outstanding liabilities by to Online Retail Partners that were expunged as part of payment to Online Retail Partners,” Helpert says.

Web/catalog synergy launched in November 1999, just as the company’s fourth annual catalog mailed to about 6 million customers and some prospects. “Our Website drives catalog traffic, and vice versa,” Helpert notes.The catalog accounts for less than $5 million of the company’s approximately $370 million in annual sales; according to analysts, the Website accounts for $3 million-$4 million of sales. Zany Brainy has 103 stores throughout the U.S.

This acquisition is only one of many changes Zany Brainy experienced in 2000. In July the company acquired competitor Noodle Kidoodle for 1.233 shares of Zany Brainy common stock for each share of Noodle Kidoodle common stock. And in September, Zany Brainy named Thomas G. Vellios president/acting CEO to replace Keith C. Spurgeon, who had resigned.

But the acquisition of Noodle Kidoodle and its 58 stores likely had little impact on Zany Brainy’s decision to acquire is online business, says Richard Zimmerman, vice president of equity research for Philadelphia-based investment firm Janney Montgomery Scott. “The acquisition of Noodle Kidoodle stood on its own,” Zimmerman says. “The two companies were competing against each other, and they realized they’d have much more strength if they combined the two units, rather than fight the 800-lb. gorillas of the toy world – such as Toys ‘R’ Us – on their own.”

Moreover, Zimmerman says, Zany Brainy’s acquisition of its namesake Website business makes perfect sense: “By bringing its Website business inhouse, the company will have more control of its e-commerce business” and will be able to better cobrand its online and offline business. “Bricks-and-clicks works,” Zimmerman adds, “but bricks is where you capture customers and maintain loyalty.”

And Zimmerman doesn’t rule out the possibility of increased catalog mailings for Zany Brainy. “I think the company will stick to its holiday book, but it might experiment with ways to drive business to the store and Website.”

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