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| DATE | 2009-01-15 |
| FROM | swd
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| SUBJECT | Subject: [NYLXS - HANGOUT] "Opportunities for open source M&A in 2009". There may be some hope
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http://www.the451group.com/report_view/report_view.php?entity_id=56492&dealbook=refer
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Sector IQ
Opportunities for open source M&A in 2009
Analyst: Matt Aslett
Sector: Enterprise Software »»
Date: 12 Jan 2009
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At the beginning of last year, we predicted that 2008 would set a new record
in terms of the amount of mergers and acquisitions related to open source
software vendors. A look back at the year-end numbers indicates that we were
a bit overconfident. In fact, 28 M&A deals were recorded by The 451
Commercial Adoption of Open Source (CAOS) research service in 2008, compared
to 34 in 2007. The slowdown is not surprising given the 40% reduction in M&A
activity in the industry as a whole in 2008. In that context, M&A activity
involving open source vendors can be seen to have outperformed the wider
industry.
With economic conditions forcing companies to do more with smaller budgets in
2009, it is expected that there will be increased interest in, and use of,
open source software this year. Does that make open source vendors more or
less attractive as acquisition targets? In this report, we examine some of
the reasons why open source might buck the trend in the coming year and see
an increase in M&A activity despite the fact that overall M&A activity in the
technology industry is expected to be down on 2008.
A look back at 2008
The standout deal of 2008 was Sun Microsystems' (Nasdaq: JAVA) acquisition of
database vendor MySQL for $1bn, which was double the value of the largest
open source M&A deal in 2007 (Citrix's (Nasdaq: CTXS) purchase of XenSource
for $500m), and the largest M&A deal involving an open source company since
VA Linux paid $800m for Andover.net (the then owner of Slashdot) before the
dot-com crash.
The $1bn price tag ensured that 2008 did set a new record in terms of the
amount of money spent on and/or by open source vendors in a single year, with
the $1.57bn total almost doubling 2007's $858.6m figure (although it is worth
noting that these numbers only include deals with a publicly disclosed value,
and that in most transactions involving open source vendors, the value is not
disclosed).
Open source deal volume, 2004-2008
Year Deal volume Publicly disclosed value Significant deals
2008 28 $1.57bn Sun-MySQL, Nokia-Trolltech, Red Hat-Qumranet, Cisco-PostPath
2007 34 $858.6 Yahoo-Zimbra, Sourcefire-ClamAV, Citrix-XenSource, Red
Hat-MetaMatrix
2006 23 $368m Red Hat-JBoss, Oracle-Sleepycat
2005 15 $326.6m Ingres carve-out, Oracle-Innobase, IBM-Gluecode
2004 4 Not disclosed Red Hat-Netscape Enterprise Business
Source: The 451 M&A KnowledgeBase
Deal drivers
Sun's acquisition of MySQL also continued a trend seen in 2007 in which open
source vendors were acquired not by proprietary competitors, but by
proprietary vendors in tangential markets (see also Citrix's acquisition of
XenSource and Yahoo's (Nasdaq: YHOO) purchase of Zimbra). Rumor has it that
MySQL had already fought off the interest of Oracle (Nasdaq: ORCL), and while
one of the database giants seemed like a probable acquirer of the open source
database specialist, it instead went to Sun, which had little or no previous
interest in the database sector but does have complementary technologies,
including software and hardware targeted at web-based infrastructure
deployments.
This trend of tangential acquisitions continued in 2008, with Linux and
middleware vendor Red Hat (NYSE: RHT) picking up virtualization specialist
Qumranet, mobile-device vendor Nokia (NYSE: NOK) acquiring
mobile-software-development tools vendor Trolltech (OSL: TROLL.OL), and
networking vendor Cisco (Nasdaq: CSCO) purchasing instant-messaging vendor
Jabber Inc and enterprise-email vendor PostPath.
Another driver for proprietary vendors buying open source specialists
historically has been the desire to take advantage of the popularity of open
source community projects to expand their reach and potentially up-sell open
source users to proprietary functionality. Previous examples of this strategy
have included IBM's (NYSE: IBM) acquisition of Gluecode Software in 2005 and
Iona Technologies' (Nasdaq: IONA) purchase of LogicBlaze in 2007 (Iona was
itself bought by Progress Software (Nasdaq: PRGS) in 2008).
An example from 2008 was Serena Software's pickup of open source and on-demand
project-software vendor Projity. The deal gave Serena an open source
alternative to Microsoft (Nasdaq: MSFT) Project in the form of OpenProj, and
a software-as-a-service offering in the form of Projects On Demand. Projity's
project-management functionality will also be integrated into Serena's
Mariner project- and portfolio-management software in 2009, providing an
upgrade path for OpenProj users seeking additional functionality.
Why open source could be an attractive target
We can expect to see more deals like this in 2009. The 451 Group's assessment
of overall M&A potential in 2009 noted that 'transformative deals' are the
least-likely transactions to get inked this year and that there is expected
to be an acceleration of 'bolt-on' acquisitions, which are typically low-risk
deals that allow companies to sell technology developed by a startup into
their existing customer base. Therefore, open source software vendors are
likely to be attractive targets, especially if the prediction that current
economic conditions will increase the adoption of open source proves to be
correct.
The expectation is not that customers will divert funds previously allocated
to proprietary projects toward open source software but that significant
project spending will be delayed while open source becomes even more
attractive for smaller, skunkworks-style projects.
We expect to see more community open source software usage, rather than
commercial open source adoption, in the short term. For that reason,
proprietary vendors won't be looking toward open source acquisitions to cover
revenue losses but, like Serena in 2008, to extend their reach into new
potential customer accounts. This strategy has the dual potential benefit of
disrupting competitors while also providing the necessary momentum to boost
the acquirer by providing the opportunity to up-sell either to commercial
support or proprietary alternatives once customers start spending money
again.
Why open source vendors might be willing to sell
If open source adoption is likely to flourish in 2009, then it begs the
question as to why open source vendors would be willing to be acquired by
larger rivals. One issue, as noted above, is that we expect to see more
community open source software usage, rather than commercial open source
adoption, in the short term. Converting community open source users into
commercial open source customers has proved difficult during the best of
times, and the economic malaise could make it even harder for open source
vendors to generate revenue from downloads.
Those vendors that have raised the necessary venture capital funding to see
them through hard times will be able to survive until the climate improves,
but those that have not will struggle. It is no coincidence that the levels
of VC funding hit an all-time high in the first half of 2008, according to
figures collected by The 451 CAOS research service. It appears that the smart
vendors saw the writing on the wall and made hay while the sun was still
shining.
Open source vendors raised $328.3m in the first half of last year, compared
with $338.6m in the whole of 2007. However, the level of VC funding declined
dramatically in the second half of 2008, with just $130.5m raised by open
source vendors, down 5.1% from the $137.6m garnered in the second half of
2007. So while a lot of open source vendors scored funds in the first half of
the year, a significant number didn't, and even though there is money out
there if a vendor has the fundamentals right, some open source vendors are
going to struggle to find further funding in 2009, and may seek M&A
opportunities instead.
Converging business strategies
Another issue relates to the business strategies used by open source vendors
to generate revenue from open source software. In recent years it has become
clear that while ad hoc support provides a tidy revenue stream for
early-stage vendors, it is slow to build the momentum VCs are looking for to
generate a lucrative exit.
Open-Core Licensing – offering proprietary commercial extensions around an
open source core – has become a popular strategy for generating revenue from
an installed base of open source users. However, building and maintaining
proprietary extensions is a comparatively expensive process compared to open
source development, and open source vendors could be forgiven for thinking
that it would be easier to be acquired and have that open source software
embedded within a larger proprietary product (as IBM has done with Gluecode
and Serena is doing with Projity) than develop the proprietary functionality
themselves.
Just as proprietary vendors might be looking to open source to extend their
reach into new potential customers, open source vendors might be looking to
proprietary technology as a means of converting community interest into
revenue.
Potential acquirers
Much of the open-source-related M&A activity to date has been driven by the
likes of Red Hat and Sun. While they are both committed to all of their
software being available with open source licenses, Red Hat has shown in the
past that it is prepared to acquire closed code and then open it (as it did
by acquiring the Netscape Security assets from AOL (NYSE: TWX) in 2004).
Red Hat has been the primary consolidator of open source vendors, and we
previously discussed the fact that it will probably have to keep
consolidating the market if it is to meet its aggressive growth targets. The
most obvious hole in Red Hat's product portfolio is the database, making
EnterpriseDB and Ingres obvious targets, while systems management has also
been an emerging area of interest. GroundWork Open Source, Hyperic and Zenoss
all fit the bill.
Meanwhile, Sun is continuing on its journey of releasing its own software
under open source licenses, and is happy to add new acquisitions to the list.
Earlier this month the company bought cloud-computing vendor Q-layer to
extend its open source xVM datacenter-automation suite. As we noted last
year, we see opportunities for Sun to consolidate the various MySQL partners
to boost its enterprise credentials. Potential targets would include database
clustering (Continuent) and backup and recovery (Zmanda). Meanwhile,
Terracotta's JVM-clustering technology has the potential to improve the
performance of both MySQL and Glassfish.
Novell's (Nasdaq: NOVL) interest in open source vendors began with the
acquisitions of SUSE Linux and Ximian in 2003 and has continued most recently
with the pickup of open source collaboration vendor SiteScape in February
2008. The company is also happy to maintain its existing proprietary
software, as well as add more proprietary technologies to its portfolio, such
as PlateSpin and Managed Objects.
While IBM is always listed as a potential suitor of open source specialists,
the company has actually made relatively few acquisitions in the space,
preferring to engage with existing open source communities rather than own
the technology outright.
Likewise, Oracle prefers to make use of open source components within its
larger portfolio of database, middleware and application software, although
it has dabbled with open source acquisitions in the past, buying Sleepycat
Software in 2006 and Innobase in 2005. An OS is a major hole in the company's
product portfolio, making Red Hat and Novell potential targets. Oracle has
maintained that it does not need to have a Linux distribution of its own
since it provides support for Red Hat via its Unbreakable Linux program,
which was launched in late 2006.
Otherwise, given the expectation that open source will prove attractive for
bolt-on acquisitions, picking potential acquirers is a matter of examining
the market sector individually. Recent 451 Group reports on enterprise
content management, data warehousing, systems management and enterprise
applications should provide a few clues.
Search Criteria
This report falls under the following categories. Click on a link below to
find similar documents.
Company: Cisco Systems, Citrix Systems, ClamAV, IBM, Ingres Corp, Innobase Oy,
JBoss, MetaMatrix, MySQL, Nokia, Oracle, PostPath, Qumranet, Red Hat,
Sleepycat Software, Sourcefire, Sun Microsystems, Trolltech, XenSource,
Yahoo!, Zimbra
Other Companies: Andover.net , AOL Time Warner, Continuent, EnterpriseDB Corp,
Gluecode Software, GroundWork Open Source, Hyperic, Iona Technologies, Jabber
Inc, LogicBlaze, Managed Objects, Microsoft Corporation, Netscape
Communications, Novell, PlateSpin, Progress Software, Projity, Q-layer,
Serena Software, SiteScape, SUSE Linux, Terracotta, VA Linux Systems, Ximian,
Zenoss, Zmanda
Analyst: Matt Aslett
Category: Enterprise Software
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