The source, who spoke on condition of anonymity, said the company had considered going public through an IPO, but that main investor Sequoia Capital had pushed for a sale instead. Sequoia did not return calls for comment.
An irreverent company, Zappos' website calls its executives monkeys and Hsieh joked in his letter that the deal's headline should read "Zappos and Amazon sitting in a tree ...," a reference to a nursery rhyme.
Zappos has put customers at ease buying shoes online because it guarantees free shipping on deliveries as well as returns.
Pacific Crest analyst Steve Weinstein said the deal allows Amazon to dominate a big new category.
"It (Endless.com) certainly hasn't been as successful as Zappos," he said. In shoes I think Zappos is clearly the brand in the mind of consumers."
The acquisition is slated to close this autumn, and Amazon said the Zappos management team will remain intact. Zappos said it will be run as an independent entity and its brand will be separate from the Amazon brand.
"We think that there is a huge opportunity for us to really accelerate the growth of the Zappos brand and culture, and we believe that Amazon is the best partner to help us get there faster," Hsieh said in his letter to employees.
Amazon said it will acquire all of the outstanding shares of Zappos and assume its outstanding options and warrants in exchange for approximately 10 million shares of Amazon common stock. It will provide Zappos employees with $40 million of cash and restricted stock units.
Based on Amazon's closing price of $88.79, the deal is valued at about $927.9 million.
Morgan Stanley, and Fenwick & West advised Zappos on the deal. Lazard Ltd advised Amazon.
(Additional reporting by Alexander Haislip; Editing by Edwin Chan and Anshuman Daga)
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