Open Source M&A

Raven Zachary, Research Director at the 451 Group along with Brenon Daly, just released a brief on open source mergers and acquisitions, "Open Source Q&A comes of Age". 

Their summary indicates a considerable growth trend:

After several years of mostly one-off deals, open source deal flow took off in 2007, setting a new record for M&A in the sector. We tallied 30 open source transactions in 2007 – twice the number in 2005 and up substantially from the single-digit number of transactions in the early2000s.

Why Buy an Open Source Company, The Obvious 

I am sure that the 451 report was a prompted by yesterday’s acquisition of MySQL by Sun but what’s of interest is not just the what and how much but the why. The obvious reasons are outlined in the brief. 

• Expansion of a Solutions Portfolio - In Sun’s case buying MySQL allows them to offer an end-to-end solution for app servers (App Server, DB, OS). This is the same thing Oracle’s doing with Unbreakable Linux, the proprietary BEA, their own DB, and the the apps companies they have acquired over the last few years. They now can boast a very broad portfolio that ultimate capitalizes on their biggest asset, the Oracle database.
• Entrance into New Markets - As the 451 report notes Yahoo’s acquisition of Zimbra for $350 million gives them a stepping stone into new markets. This is no different than IBM’s acquisition of proprietary Cognos who gave IBM a stepping stone into the business intelligence application market, a place where IBM CEO Steve Mills said he wasn’t going to play.

There are many other benefits a commercial company could get from an open source company. Though in the case of Sun and their previous open source activity they likely already understood this. 

Why Buy an Open Source Company, The Less Obvious

There are other reasons that companies might acquire an open source company that might be less obvious.

• Larger User Base, More Leverage -  Marketing, branding, and distributing commercial software is expensive. Acquiring a company that has products that are freely distributed can have a huge impact on that companies ability to grow a brand. The free user base which can grow much longer than paid base can help spread the company name and create goodwill.

  I enter exhibit A: Google search results. A Google search shows 294,000,000 results for MySQL versus Oracle’s 135,000,000. While this isn’t totally scientific it does show broad awareness for MySQL that even the $109 billion Oracle should envy. 

  

  I suspect that the newly minted $1 billion MySQL does give Oracle headaches. with their widespread adoption and the free users who otherwise might be using Oracle without MySQL as an alternative.

• Blocking - If you are an commercial open source company you realize that while ideally you would like to sell every one that downloads your product a subscription, it’s just not going to happen. However, you can chalk up a victory by converting a user to a non-paying subscription because it prevents them from choosing a competitor. For example, a free Alfresco user is not a Documentum user. Their community still gives them ancillary benefits of evangelism, brand awareness, and product feedback. 

• Cross-Marketing - Acquiring a large user base who has already given permission to contact them amounts to a large semi-qualified database of prospects for other products. The free users of that open source companies free products are also potential future customers.

• Accelerate Open Source Monetization - Citrix’ acquisition of Xensource could be one of the best examples of this. Citrix has a huge channel organization, something that would take years for Xen to build. Xen had a relatively low amount of revenue compared to their $500 million purchase price.  Citrix can now use their leveraged sales model for Xensource and likely accelerate their earnings growth rate that Xensource on their own would take longer to achieve.
  [Of course Citrix has a looong way to go to get their return on their $500 billion investment]

I am sure that there are many more benefits I haven’t mentioned as well.

Predictions for 2008 

Looking at the landscape this year I think there are other acquisitions coming. My top pick would be Red Hat’s acquisition of EntepriseDB to give them OS, App Server, and DB parity with Oracle. I would guess that SugarCRM might be a tasty snack for SAP. Only time will tell.

[Since the 451 Group's brief was posted, another 451 analyst Matt Aslett has added some additional analysis.]

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Technorati Tags: 451 Group, Acquistitions, Citrix, EnterpriseDB, Mergers, MySQL, Open Source, Oracle, Raven Zachary, Red Hat, Sun, Xensource

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