What is the value of an open-source asset? Over the past several years, and most recently with SpringSource, we've seen a number of open-source companies acquired at valuations of 10x or better. Did the buyers get their money's worth?
It's a tricky question to answer--and likely depends upon far more data than I have at my disposal. It also depends on the acquiring company executing, which has not been the case with Yahoo (which bought Zimbra) or Sun Microsystems (which bought MySQL). No open-source company can offer a panacea for an acquiring company's failure to execute.
But after talking with a range of the companies involved, it would appear that the answer is "yes"--open-source acquisitions are paying good dividends.
Consider:
- JBoss, bought by Red Hat for $350 million at a valuation 15 times sales (i.e., a 15x valuation), has gone on to grow twice as fast as Red Hat's core Linux business and is the key to its ability to sell strategic value to CIOs, rather than simply commodity Linux servers.
- XenSource, inarguably the richest acquisition at 166x, was doubling its customer count every quarter at the time Citrix bought it for $500 million. This would be less significant except that the company had already pulled in 1,000 customers. Compounding that number...? That sort of growth is hard to hard and continues to feed Citrix today. XenSource's valuation was overly rich but then, it was bought on the heels of VMware's explosive IPO. Some valuation hubris was to be expected.
- Zimbra, which Yahoo paid $350 million to acquire, has largely been buried in the belly of a company that has yet to figure out what it wants to do when it grows up (and out of Google's shadow). Even so, the company, which was doing north of $20 million at the time of acquisition, continues to grow quarter after quarter. Yahoo may not know what to do with Zimbra, but Zimbra's customers apparently do: buy more.
- And then there's MySQL. Ironically, Sun's $1 billion acquisition of MySQL, which was ridiculed as dramatically rich in valuation, has the lowest multiple of the lot, given that MySQL recorded sales of over $90 million the year it was acquired. Despite Sun's myriad problems over the past year, MySQL is growing, recording some of its best quarters ever.
Open-source assets, then, are growth assets. And their growth appears to be hard to check, even in cases of significant mismanagement. Perhaps this is the nature of open source: the company behind it may falter, but ultimately, the success of the project is only a download away, provided that the development community remains vibrant (and, in each of the examples above, it has).
Zimbra's paid user growth increases in lock-step with downloads
(Credit: Zimbra)So long as development continues, so will downloads. If downloads continue, there really should be no reason that a company can't benefit from it. It may derive substantial or anemic benefits, but it should benefit.
Looking around, it's hard to find a company that, on balance, isn't happy with its open-source investments. If open source didn't work, we'd expect to see companies exit, but in addition to the companies mentioned above, Oracle (Sleepycat), IBM (Gluecode), Cisco (Jabber), and others have increasingly bought into open source, and none shows any signs of abating its interest in increasing its open-source activities.
One might think that buying an open-source asset, rich in adoption but relatively light in monetization, would be a poor investment. Based on the data I've seen, however, this supposition is wrong.
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Once upon a time a cottage industry of platform-as-a-service (PaaS) vendors emerged to proclaim the next generation of application development. Bungee Labs (which I advise), Coghead, 3tera, and a range of others each stepped up to provide cloud-based platforms for developing cloud-based applications.
This week, however, each of these independent efforts was put on notice by industry heavyweights VMware, Citrix, and Virtual Iron: We're joining the fray.
James Urquhart calls out the significance of of their entries into the cloud platform market:
The long and the short of it is that we have entered into a new era, in which data centers will no longer simply be collections of servers, but will actually be computing units in and of themselves--often made up of similar computing units (e.g. containers) in a sort of fractal arrangement. Virtualization is key to make this happen (though server virtualization itself is not technically absolutely necessary). So are powerful management tools, policy and workflow automation, data and compute load portability, and utility-type monitoring and metering systems.
Indeed. No one is yet making any real money as a cloud infrastructure provider, but already the market is heating up to a boiling point. The entry of VMware and Citrix, in particular, may toll the bell for the independents, or perhaps it will encourage a round of consolidation.
Either way, the nascent cloud-computing industry just became a lot more interesting.
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.
... Read moreToday the Linux world broke out the champagne to celebrate VMware joining the Linux Foundation. I agree. It's good news.
What it doesn't resolve is the allegation that VMware is in active and conscious violation of the GPL. Some of these allegations appear to be well-founded. VMware's lack of response to the allegations is not golden, especially in light of its embrace of the Linux Foundation.
Here's the problem with how VMware apparently uses Linux (though there's still an open question as to whether VMware does, in fact, use Linux, the evidence points pretty strongly to VMware's use of the open-source operating system).
Products like VMware ESX Server and Citrix Xen Server divide each computer into one or more virtual machines. The virtual machines provide logical memory, CPU, and device resources to guest operating systems. ESX Server, like Citrix Xen Server, uses a hypervisor to mediate between the virtual machines and physical resources of the computer, and an embedded operating system (distinct from guest operating systems) to implement essential virtualization operations.
ESX Server and Citrix Xen Server both use Linux as the embedded operating system. This is where the trouble begins.
... Read moreJust what did Citrix buy when it bought XenSource? As Dana Blankenhorn analyzes, Citrix appears to be in a dead sprint to remove any and all value from open source, virtualization buzz, etc. that it may have acquired when it bought XenSource:
And now, a quarter after the deal was closed, Citrix officials have indicated that they will use the hot XenSource branding, but de-emphasize its identity as a virtualization company. Citrix's flasgship Presentation Server has been renamed to XenApp Server, a fitting title considering its function as an application delivery platform. But it has no XenSource code.
Citrix either got completely snowed in the acquisition or, much more likely, it's getting pressure from its bosom-buddy, Microsoft. What it's not getting is much value for its $500 million.
(Credit:
Zim Rent-a-car)
I read this Charlie Babcock (InformationWeek) interview with Peter Levine (CEO, XenSource) and Wes Wasson (corporate VP of worldwide marketing, Citrix), and I'm left with the feeling that XenSource really doesn't see Xen's future in open source, but rather in Windows.
Which makes me think it may be time to fork the project and move on. But then, the company already did that for us, didn't it?
... Read moreSaying open source is incidental to Citrix's acquisition of XenSource is like saying one would buy Red Hat and not care much about its role in the Linux kernel. Yet Matthew Aslett and Raven Zachary both suggest precisely this.
I guess they're following the flawed reasoning that Savio Rodrigues uses. Namely, that if Citrix cared about Xen and not just XenSource's proprietary technology, it could just fork Xen for free. This would be true if it weren't false. Xen without open source is an emperor without clothes.
It's also the reason that Novell failed to entice XenSource into an acquisition when it was knocking on Peter Levine's door nine months ago. It tried the "fork" argument, and gave a low valuation as a result. Guess who acquired XenSource?
... Read moreWow. The ink was barely dry on my critique of Tim O'Reilly's position on whether proprietary companies will buy up the open-source companies, and along comes the news that Citrix is buying XenSource. It's a good technology fit, but Citrix would have been one of the last companies I would have accused of a predilection for open source.
Mea ignoranta.
The news is pretty intriguing, and funny on at least one count:
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