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Open-source acquisitions: What's the holdup?

Acquisitions of open-source companies have garnered huge multiples but haven't rounded out many product portfolios. Exit plans are hazy for most open-source start-ups.

Trying to figure out a company's acquisition strategy is often complex. Some companies have very purposeful approaches to scoping out companies, products, and market segments, while others' approaches are much more scattershot.

Acquisitions of open-source companies have been a big topic of conversation ever since Red Hat acquired JBoss in April 2006. Many of us in the software industry thought that one or two large companies would snap up and consolidate several open-source companies in attempt to offer a complete open-source stack. But an open-source consolidator has yet to materialize.

In recent conversations with a number of open-source executives, it's come to light that many potential acquirers are less attracted to open-source companies that require more investment before generating revenue.

Considering that there are few private open-source companies generating beyond $15 million in annual revenue, an acquisition of an open-source company could certainly be tough for a public company to explain to Wall Street.

While a focus on the bottom line makes sense, product investment comes from many angles, not the least of which are users and developers, key drivers in VMware's acquisition of SpringSource.

If you follow the way Oracle and IBM acquire others, you see them expand portfolios--sometimes to the point where they own several similar product offerings. But from a competitive perspective, this is not necessarily a bad thing.

IBM already offered BPM, or business process management, products but acquired Lombardi to gather the revenue streams under their umbrella. Oracle, on the other hand, offered a whole suite of middleware before it acquired BEA Software but did so to achieve the economy of scale and single-source purchasing power that buyers seem to want. Oracle also acquired and immediately shut down Virtual Iron to get the product out of the market.

They may not be pretty, but these are smart tactics.

Red Hat's $350 million purchase of JBoss gave it a decent, if not totally complete, offering (the database being the big missing component, which Sun got when it paid $1 billion for MySQL) that it was able to somewhat offset with a strategic yet unprofitable move into virtualization, when it acquired Qumranet for $107 million in late 2008.

Citrix acquired XenSource for $500 million, Yahoo acquired Zimbra for $350 million, and VMware acquired SpringSource for $420 million all at whopping multiples, though none were obvious product fits, nor did any of them have annual revenue above $30 million at the time of their acquisition.

What's interesting (and maybe disappointing) in the acquisition discussion is how fractured the open-source vendor base has become, with too few companies making enough money to be meaningful from a revenue perspective. Accordingly, open-source acquisition targets need to have some kind of technology fit or magic--at the moment, cloud or virtualization--in order to have any chance at being acquired.

So what is the right acquisition strategy? It depends. Cisco Systems, Oracle, and IBM may have to buy revenue streams to keep growing, whereas I would argue that smaller vendors like Red Hat, EMC, and BMC have to make acquisitions that round out their portfolios for the future--even if it means taking a bit of a hit.

A great many open-source companies were funded in 2007, some of which will run out of cash or have to raise more money in 2010. It would be shame to see promising technologies and communities fall by the wayside as potential acquirers focus on short-term goals.