Trendy Open Source M&A

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Talk about spotting a trend. On 15 January, the 451 Group published a report entitled “Open source M&A comes of age”. Little did they know (I presume) that the next day, Sun would announce its intention of acquiring MySQL – the biggest open source M&A to date.

If you want the full report, you'll have to dig down the back of your sofa for $1,750 - rather a lot, even in these days of a risibly weak dollar. But being decent chaps, those nice 451 Group people have also put up a useful summary for those of us too mean or poor to do so.

I thought the concluding outlook was particularly well put:

Through the first nine months of 2007, open source deal flow essentially doubled each quarter, according to The 451 Commercial Adoption of Open Source (CAOS) research service. 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.

There are a number of reasons for this. On the funding side, there are many VC-backed startups that drew in rounds in previous years and have since built significant customer lists; these startups are ready to be 'harvested' by larger companies. In fact, we saw backing for open source startups hit a peak in 2006 and tail off in 2007. In the first three quarters of 2007, VC investment in open source companies hit $267m, down about one-quarter from the $340m in the same period of 2006, according to our CAOS research. Many of the startups have moved from tracking downloads while spending venture money to actually counting money they bring in, which is far more valuable to an acquirer.

Also, because open source offerings are largely component-based technology, they lend themselves to consolidation. As it stands now, specialization among many of these open source vendors presents challenges in scaling, which limits their growth. In turn, that diminishes their attractiveness to potential enterprise customers, who are reluctant to stake their business on a tiny and unknown product put together by a bunch of hobbyists. An established technology company with deep pockets as a parent goes a long way in easing those concerns.

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