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The Real Cost of Acquisitions: the Zimbra Story

General | September 21, 2009 | 2 min read

Boomtown reports that Yahoo has put Zimbra on the block. Honestly, this came as no surprise at all to us at Zoho. I remember scratching my head when the acquisition was made; I didn’t see how an enterprise/business focused open source offering like Zimbra fit with Yahoo, as a technology, as a business or strategically. Zimbra is an open source installable product offering primarily intended to be installed within medium to large organizations. Yahoo has never made an installed product in its history and is mainly focused on consumers, with an occasional foray to sell those consumer-focused applications to small businesses. Zimbra’s service provider offerings made no strategic sense to Yahoo either, because Yahoo, being a service provider itself, has no interest in selling technology to other service providers like Comcast. Finally, we have been on both sides of the product vs web-service divide, and I can assert with confidence that it is not easy to take a product and make it into a scalable web service; in fact, the main reason Zoho Mail got delayed was that it was originally written as an installable product, much like Zimbra, and we essentially rewrote it to be a web service. 

Most acquisitions fail, but I believe this particular one was particularly poorly thought out. The real cost of the acquisition is not just the $350 million paid by Yahoo. In 2007, Zimbra was starting to position itself as a cloud applications suite, a competitor to Zoho, and better known than Zoho. It is fair to say that today Zimbra is not our main competitor. The acquisition clearly slowed down them. Of course from the point of view of investors or management, the Zimbra acquisition made sense: they got theirs, so it is a “win” for them. It is unlikely that anyone would pay $350 million for Zimbra today, so for Yahoo, it is a clear monetary loss. Zimbra customers lose too, because both the original acquisition and now the de-acquisition inevitably lead to product delays and confusion. Ultimately, the Zimbra acquisition proved to be a negative-sum game, or value destruction. The price paid wasn’t compensated by the value created to Yahoo or the customers. 

Why do we care to write about this? Actually deals like Zimbra is why we never took venture capital and have said no to acquisitions. I know and respect a lot of venture capitalists, but I honestly believe the VC model is too “exit” focused. I would not say that VCs pressure companies to sell (that would be too simplistic), but the implicit understanding when you take venture capital is that you have to be working towards an exit. Well, for some of us, a company is not just a disposable commodity; it is an institution, a culture, and we prefer to build things slowly. In that sense, though we are direct competitors, I really admire the 37Signals crew and we really respect their view on this.

  1. Tom Simon

    Zimbra now owned by vmware – new ball game.

  2. Tom Simon

    Zimbra now owned by vmware – new ball game.

  3. nobody

    When Zimbra was acquired by Yahoo, they were making way below $20 million. Their current revenue will tell us the progress they made inside Yahoo.Annonymous Coward : It’s interesting to know that Zimbra scaled for 30 million users at Comcast. How many of them are active?”The decision to sell to Y! wasn’t made by the VCs, it was made by the company to get the resources to compete on a larger scale and grow the biz.”BTW, if the above is true, then why should the founder & others exit after a year. That pitch was made to convince yahoo to pay $350 million but I don’t believe that as the real reason for selling.

  4. nobody

    When Zimbra was acquired by Yahoo, they were making way below $20 million. Their current revenue will tell us the progress they made inside Yahoo.Annonymous Coward : It’s interesting to know that Zimbra scaled for 30 million users at Comcast. How many of them are active?”The decision to sell to Y! wasn’t made by the VCs, it was made by the company to get the resources to compete on a larger scale and grow the biz.”BTW, if the above is true, then why should the founder & others exit after a year. That pitch was made to convince yahoo to pay $350 million but I don’t believe that as the real reason for selling.

  5. Annonymous Coward

    I guess Google/eBay/Yahoo! shouldn’t have taken any VC funding. The decision to sell to Y! wasn’t made by the VCs, it was made by the company to get the resources to compete on a larger scale and grow the biz. It is unfortunate that Y!’s own mishaps got in the way.Zimbra is alive in well with over three thousand paying customers.Sorry to hear you had problems turning Zoho into a scalable web service, Zimbra has had no such problems and was designed from the get go to scale from 10 users to millions (30 million at Comcast). Doing the worlds largest email migration took some time, it wasn’t due to Zimbra issues.

  6. Annonymous Coward

    I guess Google/eBay/Yahoo! shouldn’t have taken any VC funding. The decision to sell to Y! wasn’t made by the VCs, it was made by the company to get the resources to compete on a larger scale and grow the biz. It is unfortunate that Y!’s own mishaps got in the way.Zimbra is alive in well with over three thousand paying customers.Sorry to hear you had problems turning Zoho into a scalable web service, Zimbra has had no such problems and was designed from the get go to scale from 10 users to millions (30 million at Comcast). Doing the worlds largest email migration took some time, it wasn’t due to Zimbra issues.

  7. Dutchkabuki

    Great post.I look forward to the mint.com one in a few years 😉

  8. Dutchkabuki

    Great post.I look forward to the mint.com one in a few years 😉

  9. Ian Wenig

    Benben,AdventNet started with Sridhar and 4 other people without any outside investment. The company is not huge by any means, it has grown organically and profitably to where it stands today.

  10. Ian Wenig

    Benben,AdventNet started with Sridhar and 4 other people without any outside investment. The company is not huge by any means, it has grown organically and profitably to where it stands today.

  11. Prasad

    On the average, motto of acquisition is like “crush the existence”!!?”Well, for some of us, a company is not just a disposable commodity; it is an institution, a culture, and we prefer to build things slowly.”I agree with you on this.

  12. Prasad

    On the average, motto of acquisition is like “crush the existence”!!?”Well, for some of us, a company is not just a disposable commodity; it is an institution, a culture, and we prefer to build things slowly.”I agree with you on this.

  13. Anonymous Coward

    Sridhar: May be you are pissed because Zimbra was founded mainly by poaching the Zoho tech. team :)Anyway, I agree with you on post points. Zimbra was stupid deal for Yahoo! and it’s only going to be a downward spiral for them.

  14. Anonymous Coward

    Sridhar: May be you are pissed because Zimbra was founded mainly by poaching the Zoho tech. team :)Anyway, I agree with you on post points. Zimbra was stupid deal for Yahoo! and it’s only going to be a downward spiral for them.

  15. naveen

    … the de-acquisition inevitably lead to product delays and confusion …This is more of a Yahoo headache and does not affect Zimbra.

  16. naveen

    … the de-acquisition inevitably lead to product delays and confusion …This is more of a Yahoo headache and does not affect Zimbra.

  17. Hariraj

    >but the implicit understanding when you take >venture capital is that you have to be working >towards an exit. Well, for some of us, a company >is not just a disposable commodity; it is an >institution, a culture, and we prefer to build >things slowly.Well said and gives a good reason to become a Zoho customer 🙂

  18. Hariraj

    >but the implicit understanding when you take >venture capital is that you have to be working >towards an exit. Well, for some of us, a company >is not just a disposable commodity; it is an >institution, a culture, and we prefer to build >things slowly.Well said and gives a good reason to become a Zoho customer 🙂

  19. Ram

    The post makes a good point. Maximizing ROI is the primary goal for a VC and it made sense to sell Zimbra for $750 million. The goals of many founders are also aligned with the VC goal and so a sale often makes sense for them too.OTH other founders may not be exit-focused and their primary goal may be to continue creating value for their customers, create a great company etc.

  20. Ram

    The post makes a good point. Maximizing ROI is the primary goal for a VC and it made sense to sell Zimbra for $750 million. The goals of many founders are also aligned with the VC goal and so a sale often makes sense for them too.OTH other founders may not be exit-focused and their primary goal may be to continue creating value for their customers, create a great company etc.

  21. j

    I believe parts of Zimbra were used to create the new interface for Yahoo! Mail. There was talk about using Zimbra internally for corporate mail but that eventually died when the decision was made to go with Exchange.The Zimbra story truly is a sad one.

  22. j

    I believe parts of Zimbra were used to create the new interface for Yahoo! Mail. There was talk about using Zimbra internally for corporate mail but that eventually died when the decision was made to go with Exchange.The Zimbra story truly is a sad one.

  23. benben

    Adventnet was a huge corp if I remember correctly – why would you need VC if you had all that $ and people behind you from the outset?

  24. benben

    Adventnet was a huge corp if I remember correctly – why would you need VC if you had all that $ and people behind you from the outset?

  25. itsaboutcode

    Can we say that any company which has taken VC money is looking for exit? I dont think so. I dont know many companies but companies like Facebook, Google also have VC money but they are not looking for exit, do they?

  26. itsaboutcode

    Can we say that any company which has taken VC money is looking for exit? I dont think so. I dont know many companies but companies like Facebook, Google also have VC money but they are not looking for exit, do they?

  27. Sridhar

    Spinning it to our “advantage”? Not taking VC money is an advantage? We are simply explaining why we didn’t take VC money; Zimbra is just an illustration of the exit-orientation that seems to accompany VC investment.

  28. Sridhar

    Spinning it to our “advantage”? Not taking VC money is an advantage? We are simply explaining why we didn’t take VC money; Zimbra is just an illustration of the exit-orientation that seems to accompany VC investment.

  29. grishick

    Funny that Zoho should try to spin this to their advantage like this. What you are saying sounds like a self fulfilling prophecy with an over-generalization. “We do not take VC investment because taking VC money makes bad exits, because look at what happened to Zimbra. Hence, we will not have a bad exit, and hence we are so cool and reliable” 🙂

  30. grishick

    Funny that Zoho should try to spin this to their advantage like this. What you are saying sounds like a self fulfilling prophecy with an over-generalization. “We do not take VC investment because taking VC money makes bad exits, because look at what happened to Zimbra. Hence, we will not have a bad exit, and hence we are so cool and reliable” 🙂

  31. Joshy J

    Hi Sridhar,”May be (sic) I will amend it with ‘They have never shipped a product for sale'”This is also not true. Sorry man, the word “never” can be a real beast when you’re dealing with a massive company that has been around for over a decade 🙂

  32. Joshy J

    Hi Sridhar,”May be (sic) I will amend it with ‘They have never shipped a product for sale'”This is also not true. Sorry man, the word “never” can be a real beast when you’re dealing with a massive company that has been around for over a decade 🙂

  33. Sridhar

    Joshy,
    I knew that was coming ;-)May be I will amend it with “They have never shipped a product for sale” …Sridhar

  34. Sridhar

    Joshy,
    I knew that was coming ;-)May be I will amend it with “They have never shipped a product for sale” …Sridhar

  35. Derek

    Yahoo Music Engine kicked ass and was an awesome installed product. =)

  36. Derek

    Yahoo Music Engine kicked ass and was an awesome installed product. =)

  37. Joshy J

    Hi Sridhar. Regarding your quote that “Yahoo has never made an installed product in its history”Yahoo! Messenger – Windows (#1 Messenger in US, is over 10 years old)
    Yahoo! Messenger – Mac
    Yahoo! Toolbar
    Yahoo! Browser PlusJust wanted to set the record on this one 🙂

  38. Joshy J

    Hi Sridhar. Regarding your quote that “Yahoo has never made an installed product in its history”Yahoo! Messenger – Windows (#1 Messenger in US, is over 10 years old)
    Yahoo! Messenger – Mac
    Yahoo! Toolbar
    Yahoo! Browser PlusJust wanted to set the record on this one 🙂