Microsoft-Yahoo post-deal disposals could include Zimbra - analysis07 February 2008

Zimbra could be divested by Microsoft if it succeeds in its unfolding bid to acquire Yahoo, said a banker and two analysts in the space.
Yahoo bought Zimbra for USD 350m in September for its open source collaboration software. The acquisition was seen by many as a counter to Google's developing suite of online collaboration-oriented applications, such as Google Spreadsheets.
Yet that same strategic position may undercut its value for Microsoft, whose own mail, instant messaging and office applications fill a similar niche, said a banker familiar with Yahoo's strategy. That could lead to a sale, he said.
Buyers could include IBM, SAP, EMC, Oracle, Salesforce.com or Novell, said IDC analyst Mark Levitt. Sun Microsystems could also be interested, said a second analyst.
One reason supporting the divestiture theory is the difficulty Microsoft might have converting Zimbra's software to a Microsoft-based platform, said Levitt of IDC.
Integrating Zimbra with Microsoft could be particularly difficult in view of Zimbra's position as open source software. Unlike closed source software, third party developers are allowed to look at and manipulate the code underlying open source software. It is a status that can be difficult to change.
"Open source technology could be thought of as opposed to the way Microsoft views intellectual property," said Dan Kusnetzky, former IDC vice president of system software and now president of the Kusnetzky Group. "It believes IP should be held tightly."
With Zimbra being an open source competitor to Microsoft technologies, Kusnetzky said a quick death could also be in its future. "I would see them more squashing it than trying to sell it to someone and thus create a competitor to its own Office products," he said.
But a sale of the unit might help the technology giant counter the type of anti-trust allegations that many are already speculating Microsoft is sure to face if the deal with Yahoo is done. "Zimbra is a competitor and the company is under intense regulatory scrutiny, so there are anti-competitive concerns if Microsoft does acquire Yahoo," said a fourth industry analyst.
Thus, IDC's Levitt said that Novell might be the most "palatable" buyer for Zimbra. The two companies linked arms once in 2006 when Microsoft wrote Novell a check for USD 348m. The move was designed to show the company is not a monopolist, said Levitt.
"It would bolster Novell and keep the heat off Microsoft," he said of a Zimbra sale. Yet analyst Kusnetzky noted that Novell might not need Zimbra based on its existing GroupWise suite of collaboration technologies.
While IDC's Levitt said an IBM buy of Zimbra could make sense, he thought it less likely that Microsoft would sell to one of its fiercer competitors.
Instead he suggested that SAP could be interested in Zimbra's collaboration software, a position Kusnetzky echoed while saying the technology could be linked into SAP's enterprise management products. Similarly, Oracle could be interested in the technology, said three separate analysts. The second analyst said Sun could also be interested in Zimbra.
With the deal for Zimbra so recent, Levitt said that the sale price of USD 350m may continue to be a reasonable valuation for Zimbra. There has not been much time for the business to mature since then, he said, estimating that it had a run rate of some USD 35m 12 months ago based on some 6m mail users.
However, Levitt said that the deal price, which was set outside of a competitive auction, may have been too high.
As a result, Kusnetzky said Microsoft could spin the Zimbra unit back into its own independent business, leaving it to compete with Redmond on its own.

by Louise Bleakley in San Francisco and James Erik Abels in New York

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