VMware's Deal to Buy Zimbra: Cloudy With a Chance of Growth

Back in 2006, I had a chance to meet up with Satish Dharmaraj, a tech veteran who had a new start-up: Zimbra. It's software was impressive. Using the new dynamic Web-based technologies that would become known as AJAX, as well as cloud computing, Zimbra essentially turned your browser into a full-blown corporate email system. You could drag-and-drop items, tag messages, share group calendars and documents, and even use mash-ups with applications such as Google (GOOG) Maps. More important, it was much cheaper than Microsoft's (MSFT) Exchange email offering.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% So I was surprised that Yahoo (YHOO) wound up buying Zimbra for $350 million in 2007. The deal's press release exclaimed: "The acquisition of Zimbra will help Yahoo! to expand its presence in universities, businesses and through ISPs by enabling organizations to host email on or off premises with their own domain."

Was this a sign that Yahoo was poised to make a play for the enterprise? Or was this just another wacky M&A deal?

Well, it looks like the latter was the case. This week, Yahoo sold Zimbra to VMware (VMW), apparently for about $100 million or so.

Dealmaking Deja Vu?

I'm getting the same dubious feelings about this deal as I had about the last one. While VMware is certainly a top enterprise player, the fact remains that its focus is on infrastructure; that is, using so-called virtualization to greatly enhance information technology resources.

Why would VMware get into email and collaboration? In its press release, it claims the rationale for the deal is to further its "mission of taking complexity out of the datacenter, desktop, application development and core IT services, and delivering a fundamentally more efficient and new approach to IT." All in all, that sounds fairly vague. And yes, it bears an ominous resemblance to Yahoo's press release of three years ago.

There's no question that Zimbra has a great platform, which counts more than 55 million mailboxes and experienced 86% growth last year.

However, with this acquisition, VMware is moving beyond its infrastructure roots into the highly competitive application sector, where its list of rivals will include Google, IBM (IBM), Citrix (CTXS) and of course, Microsoft.

Sketchy Strategy

Then again, VMware has already been making moves to expand its reach, such as its $420 million deal for SpringSource back in July. This open-source platform makes it easier for enterprises to move applications into the cloud (which is in high demand).

But so far, the overall strategy appears sketchy. Perhaps the reason is that the dealmaking is still in progress.

It's never easy to make a big jump into a new technology category, especially one that is full of entrenched competitors. Besides, VMware must deal with serious threats against its highly profitable virtualization franchise. If anything, the Zimbra deal looks like a classic sign of a company that's reaching the limits of its current business and needs to find long-term growth somewhere else.

But as Yahoo's experience with Zimbra has already shown, that's a tough strategy to pull off.
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