I Do Not Believe that Zappos Was “Forced” to Sell
There are quite a few stories circulating in the blogosphere and Twittersphere discussing the recent acquisition of Zappos by Amazon. Some of these articles have a quite sinister and devious tone, imagining some remarkable behind-the-scenes drama that would make Spielberg pay attention. Here are two specific example:
PE Hub’s “Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity—Sources” and the more strongly titled “Zappos Deal Shows VCs Hate Entrepreneur“.
I should state up front that I have no specific data on this deal. I haven’t talked to Sequoia nor Tony Hsieh. That said, my view is these articles are little more than sensationalist journalism guaranteed to attract a ton of page views. The specific charge that I call into question is the suggestion that Sequoia forced a sale of the company.
The first thing to point out is that it is very unlikely Sequoia had any “mechanism” to “force” a sale of the company. I am unaware of any “you must sell now” clause in any corporate documents. A VC might have one BOD vote out of five or more votes, and the right to vote their shares, but this is also a minority claim. Preferred investors do have have “blocking” rights, but this gives you the ability to stop something, not make something happen.
The more important point to make is that the CEO of Zappos, the remarkably successful and talented Tony Hsieh, had several mechanisms to block a deal if he in fact was not in favor of it.
1) Tony could have withheld his vote at the BOD level, or even dissented. Most public companies will not go through with a sale with a split BOD vote on any acquisition, and this would be doubly true if that vote were the CEO. Acquirers typically indemnify the BOD of the acquired company, and a split vote would leave the door wide open for liability claims from Zappos other shareholders. I don’t have any details on this specific deal, but I would be very surprised if it wasn’t a unanimous BOD vote (this detail will eventually be provided in the proxy; Update: S4 now available – tons of data).
2) For the exact same reason, Tony Hsieh “could have” withheld a positive shareholder vote from his common shares. Almost no major public company would approve a merger if there were a large voting block (from the company being acquired) dissenting the deal. Once again, I suspect Tony voted his shares in favor of the deal.
3) Last but not least, Tony Hsieh could have informed Jeff Bezos that he does not want to sell and that he will not work for him, and that he would convey that same message to his employees. This “blocking mechanism” is perhaps more powerful that the first two.
Of course, none of these three things happened. Tony sent an amazing letter to his employees espousing the merits of the deal and the shared culture. He also directly informed the press that these conspiracy theories were misplaced.
Personally, I think its a great match and a great outcome for both companies. They have a shared mission and very similar service oriented customer brand.
Note: As I have stated in my blog posts before, I am an Amazon shareholder in my personal account.
Update: A very relevant post from TechCrunch.