Jun 19, 2017 ยท 5 minutes

Once upon a time, the bears used to talk about how Amazon the e-retailer was just another retailer in dot-com clothing.

Amazon came along and presented itself as a new kind of retail store leveraging the World Wide Web, one that needed to be valued differently. Not so, the bears roared. Amazon still has distribution centers: physical operations that cost a lot of money to maintain. In time, Amazon grew bigger and bigger and the bears grew quieter – and mostly extinct.

One day, something amazing happened. Amazon turned into the brick and mortar business that the bears had accused it of being all those years ago! Only there weren't any bears around to say we told you so. To insist it be valued the way a dying retail chain should be valued.

Instead, everyone cheered Amazon for a magical transformation that not only surprised them but maybe, just maybe, involves more risk than sense. Nobody wanted to say that, though, because questioning Amazon tends to make people look stupid later on. So everyone acted as if Amazon would live happily ever after.

I tell that little story because I am going to do something that may very well make me look stupid later on. Which is to take a shot at, not so much at Amazon, but the veneer of invincibility that surrounds it right now. And not just Amazon, but the brotherhood it's formed with Facebook, Apple, Microsoft and Google. The mighty FAAMG.

FAAMG is a silly term, and not only because it sounds less like a fearsome fivesome than an arcane subcommittee tasked with overseeing global accounting standards. FANG was much better, but then Netflix fell a little behind. But the Wall Street banks, which love to toss out these little acronym clumps to excitable investors, realized the cloud is really helping Microsoft, and so they conjured a new one.

Whatever the prevailing swirl of alphabet soup, the bigger takeaway is that there are a handful of gigantic tech companies that are dominating the consumer-tech industry. And they keep getting stronger by the year. So much so that the market has fallen into a lazy complacency about who's winning in tech and where to invest. The problem lies in that complacency.

The combined market cap of the FAAMG is nearly $3 trillion. Add in two of China's tech giants – Alibaba and Tencent – and the seven companies are worth an aggregate $3.6 trillion, according to the Economist. Together, this group has risen 40% over the past year alone. An ETF tracking global developed markets has risen 17% in that time.

It was only about a week ago that FAAMG investors were suddenly spooked because an analyst warned about this growing complacency that couples high valuation with low volatility. One week later, all of them but Apple have rebounded. Any lingering concerns were brushed aside Friday by the Amazon's mega-deal.

Software is, as we keep hearing, eating the world. Now, with Amazon's planned $13.7 billion purchase for Whole Foods Markets, this is not just happening in a manner of speaking, it's literally happening. Amazon is ingesting the kind of company it has been competing against for two decades. And the collective “yup” that greeted the news sounded an awful lot like the complacent advice to buy FAAMG and sit back to await capital returns.

To be clear, there are reasons to think this deal may work out, and the arguments made to explain why aren't crazy: Amazon needs more local distribution centers to deliver meals and groceries. Wal-Mart is becoming a threat because its stores already offer this, as well as curbside pickup. Amazon's demographics line up with Whole Foods. Amazon logistics and Go tech can improve the prices and service people love to tweak Whole Foods about.

But let's also not underestimate the challenges this deal presents. Amazon has shied away from multi-billion-dollar purchases for a reason (aside from Zappos, bought for $1.2 billion, its acquisitions were nine-digits in value or less). There is a poor track record for corporate M&A deals working out when two big companies are involved. Just look at Google buying Motorola Mobility for $12.5 billion, then selling it for $2.9 billion.

The reasons for this are ones that the Amazon-Whole Foods combination do not seem immune to: Grafting a startup into a tech giant can be tricky enough. The cultures may be oil and vinegar. Tech, HR and other systems can be awkward to integrate. And yet the complexities involved scale up once you bring in a big, older company set in its ways. If Amazon leaves Whole Foods independent, as it's wont to do with its acquisitions, does that mean it will own a grocery chain in decline? Whole Foods has lost two thirds of its value in the last two years.

On the other hand, that decline suggests Amazon has plenty of room to weed out inefficiencies. But this gets at another difference between the two companies: Amazon's focus on holding down costs versus Whole Foods' reputation as a high-end (if high-priced) grocery chain. How, aside from better logistics, can Amazon cut costs without sacrificing quality? Amazon notoriously takes much better care of its tech workers than its warehouse workers. Onto which side of the divide will Whole Foods' store workers fall?

That goofy laugh of Jeff Bezos has always concealed a creative-destruction zealot who wanted to tear down brick and mortar. To grind those corny old shopping malls back into the craftsman's mixture of clay, shale, lime, and sand they came from. And doing it all to solve our retail problems. Now, to solve that problem, he's buying a piece of the problem.

In that sense, this deal is a step backward into the very retail stores the company was designed to undermine. And also a deal that could take Amazon two steps forward into a future where retail stores continue to die away, only at a faster pace - except for the ones that serve as outposts for Amazon's digital empire. Meanwhile, the choice consumers have among retailers today is gradually displaced by the extremely, honestly, purely, very good will of Amazon CEO Jeff Bezos.

This a bold move by Amazon, and like any bold move carries a good degree of risk. Risk that isn't being figured today into Amazon's complacently rising share price.

Many observers pointed out Friday a comment that Whole Foods CEO John Mackey made about Amazon two years ago, that groceries would be its Waterloo. Either that quote hasn't aged well, or Mackey simply failed to find the right military metaphor. To borrow from another legend in the annals of war, what if it's Amazon's Troy: a defeat where the great power is felled by an old-school wooden horse, in the form of Whole Foods itself?