Open source after the M&A honeymoon

InformationWeek's Charles Babcock takes a fascinating look into the pros and cons of open-source mergers and acquisitions, and comes up with some interesting perspectives in the process. In sum, if you want to acquire an open-source software company, you'd better be very clear about what you're buying, and how you're going to pull value from it.

Squeeze too hard, and you risk alienating the community of customers, developers, and interested onlookers that made the open-source project successful. Squeeze too lightly, and you end up being popular and poor.

There is no one-size-fits-all approach to acquiring open-source projects, as the article points out. Indeed, sometimes a private equity buyout of sorts ends up yielding the most value.

What do I mean by "private equity buyout?" Consider XenSource.

XenSource was bought for the princely sum of $500 million despite offering virtually nothing in the way of revenue and a clear business model. Under Citrix's proprietary hand, however, XenSource has gone from pocket change to what XenSource CTO Simon Crosby says will be $50 million in revenue this year. Crosby tells InformationWeek that "XenSource has close to 3,000 customers, compared with 1,800 at the time of the acquisition." Considering that it made less than $10 million or so in sales off those 1,800 "customers," XenSource may well be thanking the proprietary gods right now that Citrix gave it a new way to monetize adoption.

But this doesn't tell all of the story on open-source M&A. If it were a matter of "buy open source, make it proprietary," more would have done it by now. Some, like Red Hat, actually go in the opposite direction, as it did with Sistina, taking proprietary code and open-sourcing it. But the JBoss example is even more interesting, because it involves taking a pre-existing open-source project and trying to improve its financial yield by changing its business model.

By all accounts, including Red Hat's, Red Hat initially botched its JBoss acquisition. An exodus of JBoss employees resulted, prompting Red Hat to reconsider its approach to the company and its product. While Red Hat proceeded with applying its RHEL model to JBoss, it also (eventually) embraced JBoss' model for working with system integrators, among other things.

Two years later, JBoss is thriving under Red Hat's hand, with some geographies showing JBoss sales set to surpass Red Hat Enterprise Linux (RHEL) business, I've heard from sources both inside and outside the company. Red Hat cracked the code on open-source M&A. It took awhile, but it is paying dividends now.

All of which leads to Babcock's conclusion:

So there you have it. Open source code has gained in value over the last two years, and that value is recognized in the high acquisition prices. The open source code, of course, remains freely available, but the code's value withers if there's no community of independent, critical users and developers driving it forward, with leadership to guide it.

Some acquirers will seek a return on their huge investments by turning the open source into an enhanced "enterprise" product line that, in a matter of months, creates lock-in no different from proprietary code. Some will sustain and encourage a community, balancing the community's interests with the need to drive profits. Some software companies have grown by being good at acquiring and integrating startups. They have a new skill to learn in doing that with open source.

The key is to understand what you're buying (Code? Cash? Community?), and act accordingly. Don't be misled by myths. Ultimately, an open-source acquisition is just like any other: if it's not driving dollars, it's not worth doing. Those dollars may be short or long-term, but if you're acquiring an open-source project to be Top of the Pops on SourceForge, you probably deserve the failure you're going to acquire.