Valley Girl July 30, 2009, 10:06PM EST

Amazon-Zappos: Not the Usual Silicon Valley M&A

Amazon.com's takeover of its Internet retail competitor likely isn't just a cash-out for Zappos' founders such as Tony Hsieh

Story Tools

Cover a few mergers and acquisitions in techland and you'll quickly learn the difference between what companies say and what they mean. A few examples:

Acquirer says: The target will be run independently with its own management team.

Acquirer means: That'll happen for a while—until we need to cut costs by folding the target into our operations.

Target founders say: We're not going anywhere!

Target founders mean: As soon as our ownership vests, we're gone.

Acquirer says: We hope [the target's] innovative spirit rubs off on the rest of our company.

Acquirer means: This competitor may one day be a serious threat. Let's take them out now.

Cynical? I've covered enough high-tech deals to know better. For the target company and its investors, takeovers are a way to cash out. For the acquirer they're a means of hiring good engineers and removing a would-be rival. Products frequently languish or are discontinued, and key employees at the target typically leave.

Even Google (GOOG), considered among the most entrepreneurial of publicly traded tech companies, has killed off scores of small acquisitions. Remember Jaiku? Google bought the Twitter clone a few years ago and did almost nothing with it, while Twitter grew to some 20 million users. Microsoft (MSFT) squandered billions of its own dollars on fruitless efforts to take on Google in search before it offered $45 billion to take out Yahoo! (YHOO). Ultimately it was forced to accept a deal that lets Yahoo keep 88% of the proceeds of advertising sales. Even this more limited partnership is likely to accelerate Yahoo's engineering and innovation exodus.

This backdrop is what makes Amazon.com's (AMZN) acquisition of Zappos especially remarkable. Having followed both companies closely and having known several of the people involved, I can say that this is a rare instance in which the principals mean what they say. Amazon's Zappos deal might well become an exception to Silicon Valley's takeover rules.

Unparalleled Customer Service

Zappos was in what could have been an ugly situation. It was a 10-year-old company from which its investors quite legitimately wanted a return. Zappos has $1 billion in gross merchandise sales, boasts a well-known brand, and enjoys an unparalleled rep for excellent customer service.

The trouble is, Zappos CEO Tony Hsieh isn't one of those all-too-common "serial entrepreneurs" who wanted a quick exit and an excuse to try something new. For him, Zappos' first decade was just the beginning.

A share sale to the public wouldn't have given Hsieh the freedom to keep innovating and likely wouldn't have been well-received. Good customer service, including local call centers and free shipping, comes at a cost. Zappos barely breaks even. So that meant an acquisition was one of the only other alternatives.

Good thing it was Amazon that came calling. Amazon is as different from most publicly traded tech companies as Zappos is from most startups. For one thing, Amazon is one of the few that are still run by its founder. And say what you will about Jeff Bezos, he's not known for kowtowing to Wall Street pressures. Bezos and Hsieh alike are willing to disregard short-term gains for the sake of long-term vision.