Why buy an open source company?

As Mark Hinkle has already noted, The 451 Group recently published a brief on open source mergers and acquisitions, written by open source research director, Raven Zachary, and financial analyst Brenon Daly. It is a happy coincidence that the report was published the day before Sun announced its acquisition of MySQL.

Clearly the report does not take the Sun/MySQL deal into account, but this is clearly something that we are tracking on a long term basis. Expect some further and deeper analysis in the future to take in the MySQL deal as well as any others that follow.

Additionally, it is important to consider open source M&A in the context of the wider technology M&A outlook. Our analysis of open source M&A is part of The 451 Group’s Technology M&A Outlook Report, a 75-page report that examines likely M&A and IPO developments in 2008 for a number of enterprise technology sectors (for more information about the report, click here).

In the meantime, here’s a few standout points from “Open source M&A comes of age”:

  • 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 early 2000s.
  • Moreover, the pace of deal making picked up throughout 2007. Through the first nine months of 2007, open source deal flow essentially doubled each quarter. We tallied just three deals in the first quarter, six deals in the second quarter and 13 deals in the third quarter. And although the fourth-quarter pace slowed a bit, with eight transactions, we expect the number of open source deals to set a new record in 2008.
  • We have identified several distinct deal drivers for open source M&A:
    • Entrance into new markets
    • Portfolio expansion
    • Consolidation play
    • Business overhaul
    • Technology play
    • Project acquisition
    • Technology transfer
    • Carve out

For examples of all those drivers, further discussion of 2007’s big deals, and the outlook for 2008, check out the report. The 451 Group subscribers can also access it here.

5 comments ↓

#1 Dennis Byron on 01.18.08 at 9:50 am

Matthew –

Good summary in the article especially the table that compares the different valuations.

What the comparison also says is that (1.) the Citrix/Xensource deal was an incredible outlier or (2.) the valuation of OSS pureplays and OSS pretend pureplays (those with an “Enterprise Edition” or some such device) is rapidly coming back to earth. Vs. the 500X you cite for Citrix (we think it’s more like 100X based on subseqent Citrix SEC filings but it was a hell of a lot no matter which estimte you use), Sun “only” paid somewhere between 13X and 20X MySQL’s 2007 revenues. To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource. But of course we won’t know if that’s true for a year and Citrix won’t tell us if it was wrong anyways.

Bottom line: Alfresco, Compiere, Jaspersoft, and other OSS application providers are still in the IPO parade but the OSS infrastructure guys best get out of the line of march and find their “proprietary partners” as soon as possible.

Dennis

#2 Matthew Aslett on 01.18.08 at 10:16 am

Thanks Dennis. I think XenSource was a special case, for reasons discussed here http://blogs.the451group.com/opensource/2007/08/15/citrix-acquires-xensource/ so it doesn’t really make sense to compare the multiples, but you may well be right about the OSS infrastructure vendors

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