May 1, 2001 2:30 PM PDT

Linuxcare, Turbolinux reverse merger plan

After three months of operating as a single company, Turbolinux and Linuxcare have called off their merger because of difficulties joining the companies' finances and operations.

Facing a chilly investor environment regarding the Linux operating system, the two companies announced their intent to merge in January and closed the deal Feb. 21. The justification was that Linuxcare's specialization on services complemented Turbolinux's product emphasis, but now it appears the two different businesses didn't dovetail so smoothly after all.

"I think the goals of the two companies were different," and the economic climate made things worse, Linuxcare Chief Executive Art Tyde said in an interview Tuesday. "There were certainly financial details involved--everything from valuation to cash in the bank and assets."

"It just didn't make financial sense to put the thing together," but the companies will still jointly work with customers, Turbolinux CEO Paul Thomas said. The economic climate has changed since the two companies began talks five or six months ago, he added.

On the Linuxcare side of the house, the company has enough cash to last two years, Tyde said. Turbolinux has "more than enough cash to take us to profitability," he said, though he declined to state when that day would arrive.

But for the funds to last that long, the company will make more major changes. Tyde said that after the merger cancellation details are worked out, Linuxcare likely will lay off more staff, in addition to staff cuts announced in February. And the company will abandon the technical support business plan that had been at its heart since the company started promoting itself in February 1999.

Collapsing Internet businesses, curtailed technology spending and dry venture capital wells have hammered the Linux business landscape, leaving layoffs, restructured business plans and closed companies.

It's a stark change from the Linux heyday, when Linuxcare announced a $32.5 million infusion in December 1999 and Turbolinux trumpeted the $57 million it raised just a month later--the most venture financing any Linux company raised in one fell swoop. Both companies had filed to hold initial public offerings but withdrew the plans.

When the merger was announced, Turbolinux was delighted to be able to call upon Linuxcare to offer services it lacked. Now, with the merger undone, Turbolinux will rely on its own smaller staff and partnerships with other parties to provide the service and consulting work, Thomas said.

Giga Information Group analyst Stacey Quandt never had been in favor of the merger, suggesting Linuxcare would have been better off joining forces with a company with greater market share.

Among Linux software sellers, Red Hat is dominant in the United States, SuSE in Germany and Conectiva in Latin America, Quandt said.

"The only market (Turbolinux) claim to have is in Asia-Pacific, more notably Japan," Quandt said. "The integration of the two companies seemed overall questionable."

Thomas acknowledged its difficulties expanding its influence geographically. "On the pure distribution side, we have not made progress in the U.S. Clearly Red Hat continues to dominate that," he said. "Our biggest market share is in Asia-Pacific and Japan."

But the company is concentrating not on distributing as many copies of its software as possible but rather on getting large corporations to use it, Thomas said.

Linuxcare faces issues of its own, though. "Linuxcare has lost people in the transition," Quandt said, including top programmer Andrew Tridgell and two cofounders, Dave Sifty and Dave LaDuke.

Though the merger is off, it's likely Turbolinux and Linuxcare still will work closely together through a strategic partnership, Tyde said.

Though the companies signed a definitive agreement to join forces, such agreements can be canceled under some circumstances, such as shareholder or board disagreement, Tyde said.

Linuxcare got its start offering companies technical support for Linux so customers could bank on having help if something went wrong. The earlier lack of such support had been one criticism of why Linux was weaker than competitors such as Windows or Unix, of which Linux is a clone.

Now, Tyde said, the company is shifting from providing customers with this type of technical support to helping programmers get Linux software written--for example, converting other software to run on Linux or writing software enabling hardware products to work with Linux.

"Technical support is just not a winning proposition in this market," he said. "It's expensive to do. You're not getting a lot of customers."

The failed merger plan hasn't been easy, Tyde said.

"I won't lie and say there wasn't a certain level of disappointment," Tyde said. "You can go into a merger with absolutely all the best intentions. Then, as you work together, as trust is built, you get a handle on what a combined company is like. You learn a lot about yourself, your partners, the core values of the organization."

 

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