My Take on the Zuora Acquisition

On October 17, 2024, Zuora announced its acquisition by Silver Lake, a private equity firm, for a total of $1.7 billion. The acquisition was not unexpected. My former employer had already announced on April 17 that it was “exploring strategic options, including a sale”. The buyer was also not a surprise, as Silver Lake had already invested $400 million in Zuora on May 9. Acquiring the remainder of the company cost them only $1.3 billion. 

What is surprising is the price. 

The offer of $10 per share represents a meager 6% increase above the previous day's closing price of $9.42. Yikes! As a shareholder who has been holding underwater shares from an ESPP purchase over 3 years ago, I find this quite disappointing. Sure, you might say that an ARR multiple of 3.7 is what PE companies pay (Zuora expects to make $455.5-461.5 million this year). But that doesn’t make it any better for the investors. The stock closed at $9.91 on Friday which signals that many other investors are unimpressed. 

How did Silver Lake manage to secure such a lucrative deal? 

Zuora pioneered subscription billing and remains the company to beat in this space. It boasts an impressive roster of customers, a highly knowledgeable team, and a broad range of capabilities that none of its competitors can match today. Yet, Zuora’s stock has remained stuck in single digits for almost three years, with no upward movement. 

This stagnation isn’t due to poor execution. The management team has lately consistently exceeded earnings expectations quarter after quarter. The issue wasn’t execution—it was strategy. 

A subscription billing platform operates between orders, payments, and the general ledger—in other words, between CRM, payment processors (PP), and ERP. These are Zuora’s strategic touchpoints; its inputs and outputs. When Zuora first started, it was the only game in town. However, today, all those vendors have added subscription billing capabilities, which puts pressure on the demand for Zuora. Salesforce (CRM), MS Dynamics (CRM), Stripe (PP), Gotransverse (PP), SAP (ERP), and NetSuite (ERP)—they all offer subscription billing today and they don’t need Zuora. 

When you’re being squeezed by all your strategic touchpoints, you must find a way out. One strategic option is to push back by adding capabilities that encroach on their turf. That’s what Zuora did by introducing solutions like CPQ, payment recovery, and revenue recognition. Unfortunately, this fragmented approach didn’t succeed, especially when facing much larger competitors like Salesforce, Stripe, SAP, and Oracle. In such situations, the next strategic move is either to find a new direction for expansion—which, arguably, wasn’t available—or to specialize. 

That’s exactly what Zuora did by deepening its focus on the manufacturing and media sectors. It even acquired a paywall vendor Zephr to strengthen its media solution. However, most manufacturing companies are not good at selling software or data subscriptions, and most media companies already know how to do subscription billing and deal with more existential problems. Focusing on verticals was the right move, but Zuora probably chose the wrong ones. It’s easy to critique in hindsight, but selecting other verticals like insurance, financial services, healthcare, or utilities might have been a better strategy for verticalization. Maybe. 

In the meantime, Zuora began missing out on many software market opportunities, while software is the largest market for subscription billing. Software companies need billing solutions from the early stages as tiny startups, but Zuora’s platform, designed to handle some of the most demanding enterprise billing scenarios, is too complex for startups. What these companies are looking for is a simple billing solution that can be integrated with just a small snippet of code, like the solutions from Stripe or Metronome.  

Zuora was also slow to respond to the rise of usage-based billing, which is a hot topic these days. Whether usage billing is the future remains to be seen, as most customers seem to hate it. However, its emergence created an opening for upstarts like Metronome, Orb, M3ter, and Tioga—the latter eventually acquired by Zuora. Unfortunately, that move came too late to make any significant impact. 

Moving down-market is nearly impossible for an enterprise software vendor; it’s difficult to simplify software built for large enterprises (the opposite is somewhat easier). Acquiring an SMB vendor to target the SMB market was likely not an option for a relatively small publicly traded company with not that much cash on hand. It seems like Zuora wasn’t left with many strategic alternatives here. However, failing to act quickly enough on usage-based billing was another key strategic misstep. 

Out of strategic options, Zuora publicly put itself up for sale. Silver Lake quickly seized the opportunity with an initial investment, and since no strategic buyers emerged, Silver Lake ended up acquiring the entire company a few months later. The modest 6% premium reflects the strategic predicament Zuora found itself in. Silver Lake got a good deal, and now Zuora will need to figure out its strategy under private equity ownership, which is not known for fostering growth through innovation investments. 

I wish Zuora well. It’s a great company that stands as a shining example of category creation, thought leadership, and solid execution. However, I’m unhappy about the stock price.