Open-source M&A: The scorecard to date

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).

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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