Amazon announced that it has purchased e-commerce apparel company Zappos for 10 million Amazon shares. $880 million per NASDAQ’s closing price on Wednesday.

Zappos employees also will get $40 million in cash and restricted stock. The final results will be closer to $920 million and Zappos management will remain in place. Tony Hsieh, Zappos CEO said in his email announcement that they had signed what?s known as a "definitive agreement", in which all of the existing shareholders and investors of Zappos (there are over 100) will be exchanging their Zappos stock for Amazon stock. Once the exchange is done, Amazon will become the only shareholder of Zappos stock.

Sequoia Capital, the venture capital firm that grew to prominence with early investments in Internet wonders Google and Yahoo, can check off another successful dot-com deal with the sale of Zappos to Amazon. According to a 2005 Wall Street Journal article, Sequoia Capital then had a ten percent ownership position in Zappos.

Zappos, which means shoes in Spanish was founded in 1999 by Nick Swinmurn as Shoesite.com. He could not find his own shoe size on the Internet. His idea of expanding the selection of sizes and styles gained traction when he raised $150,000 in start-up capital from family and friends.Then he met Tony Hsieh, and launched a long term partnership. Hsieh had sold his company, LinkExchange, and started a venture fund. Hsieh invested $500,000 into Swinmurm’s project because in 1999, five percent of the $40 billion shoe business was already being handled through mail order. Swinmurn said that people were already buying shoes without trying them on.

Zappos has a strong customer following because it treats them right. This starts with Hsieh, the CEO, and is practiced by every employee. Hsieh says that any unhappy customer or disgruntled employee can blog about bad experience with a company, and the story can spread like wildfire by email or with Twitter. He goes on to point out that the good news is that the reverse is true as well. A great experience with a company can also be read by millions of people almost instantaneously. Zappos is one of Twitter’s biggest corporate users and their future boss, Amazon’s CEO Jeff Bezos, is one of Twitter’s investors.

Hsieh said "Amazon focuses on low prices, vast selection and convenience to make their customers happy, while Zappos does it through developing relationships, creating personal emotional connections, and delivering high touch (‘WOW’) customer service." Hsieh said that during the negotiation, that Bezos made it clear that he had a great deal of respect forZappos culture and that Amazon would look to protect it.

After the announcement, a blogger sent Hsieh the following comments: "I hope the Zappos culture rubs off on Amazon and not the other way around. Zappos is the easiest and most courteous online company today. I’ve been buying from you for years and love your prompt service and upbeat customer representatives who communicate clearly and solve problems quickly when they occur (which is almost never, in my experience!) Just keep up your great work."

According to Forrester Research, online apparel, footwear,and accessories generate about $23 billion in annual sales, ahead of personal computers at around $16 billion, and consumer electronics at around $11 billion.

Jeff Bezos's first attempt at shoe business didn't went as planned

Several years ago, Amazon made an effort to compete directly against Zappos with a footwear Web site called Endless.com. Sucharita Mulpuru, a Forrester Research analyst, said that Amazon has been trying to sell shoes online for years with very little success. An Amazon spokesman said the Zappos acquisition doesn’t imply the company is disappointed with Endless.com, whichhe said Amazon will continue to operate.

Amazon has historically shied away from large acquisitions, preferring smaller to mid-sized deals. In the past, Amazon purchased online audio-book Web site Audible Inc. for approximately $300 million and Chinese retailer Joyo.com for about $75 million.

In Fall of 2008, Zappos had to lay off eight percent of their employees. However, they did it in a truly professional manner. Hsieh emailed his employees with some very generous termination information; Zappos paid each laid-off employee through the end of 2008 (then about two months), and offered an additional amount for employees that had been with them for three or more years. Hsieh further said that because Zappos regular health benefits cover 100 percent of medical, dental, and vision for employees and 50 percent for spouses and dependents. Zappos had decided to offer to reimburse laid-off employees for up to six months of COBRA health insurance payments. Hsieh admitted then that they expected it would actually increase, not decrease, Zappos costs for 2008, but they felt "this is the right thing to do for our employees."

Both Amazon and Zappos said in their press releases that the ten year-old online shoes-and-apparel retailer will remain headquartered in the Las Vegas suburb of Henderson, Nevada.