The Linux hype before the VOIP IPO flurry

At the peak of the Linux IPO hype in 2000, I wrote an article about the ten private companies most likely to be acquired or go forward with an IPO. I was completely transfixed by the whole linux scene at that point, as many other participants and analysts were.

In hindsight the article is embarassingly on the frothy side. Some of the companies I lauded here don't even exist today. But of the ten private linux companies I predicted would do well, a few actually did. If I had been a venture capitalist and had put equal amounts into these companies (including those that eventually flopped) I think the return may still have been at least a ten bagger.

Reading the article again after five years brings back some vivid bittersweet memories. I'm sure anyone who worked in this industry at that time could relate to that. Below is the article as written five years ago.

An Overview of the Linux IPO and Acquisition Arena: Who's Next?

By Mitrax
June 2000

The financial world woke up to the market potential of Linux in August 1999 when Red Hat became the first pure Linux player to issue an IPO. Since then many analysts, venture capitalists and members of the press have began to pay serious attention to developments in the linux arena, as well as in the broader open source segment of the information technology sector.

A flurry of financial activity has taken place since this first stupendously successful IPO. Andover.net, Caldera Systems, Cobalt Networks and VA Linux were the next in line to proceed with IPO's. Other players, including Lineo, Linuxcare, TurboLinux, and Rackspace are likely to proceed to the IPO gates very shortly and we can expect several more companies to follow suit in the next few months.

There are only a handful of linux companies who employ over fifty people at this time, but it is already apparent that these larger companies are not hesitating to scoop out potential winners before these smaller privately-held companies build the wherewithal to proceed to the IPO gates; or worse, before they are acquired by the competition.

Knowledgeable players in this industry have been busy hand-picking their favorites over the past year. At least fifty private Linux companies have been acquired by Red Hat, VA Linux, Internet.com and others during this time.

In this article we review some of this recent acquisition activity. We also select ten relatively unknown private companies which are most likely to proceed with an IPO or be acquired by a larger company over the next year.

Overview of Recent Acquisition Activity

Linux is a computer operating competing with other operating systems such as Windows, NT, Mac and Solaris. The unique and revolutionary aspect about Linux however, is that unlike other operating systems, which are proprietary and under the ownership and development control of one company, Linux source code is open to everyone and has been developed by thousands of independent programmers all working together on a volunteer basis to improve on the basic software over a period of many years. Such a cooperative endeavor, coordinated and developed by a massive number of independent volunteers around the world, could not have occurred before the advent of the networked communication system made possible with the emergence of the Internet. In this sense Linux can be considered to be a product of the Internet and it is only one application of a myriad of other open source software developments which are now being developed in the same manner.

There are three basic segments of the Linux market. Software development, hardware enhancement and the actual 'marketplaces' or 'community centres' where hundreds of thousands of programmers and other players in this community gather to disseminate news, exchange ideas and build on the current base of innovation.

Linux hardware leaders are VA Linux, Penguin Computing, IndyBox, Cobalt Networks and Atipa Linux Solutions. However, the larger, more established computer hardware companies are now entering this market space and their long-standing corporate customer relationships and much larger marketing arms will make the competitive situation tougher for the smaller hardware companies. It is likely we will see the formation of several significant alliances and acquisitions between the older hardware companies and the linux upstarts over the next year.

The Linux operating system is now distributed commercially by a handful of software companies (including Corel, Caldera, Red Hat, MandrakeSoft, Stormix Technologies, SuSE and TurboLinux) which all originally competed on the basis of making small enhancements to the basic linux freeware in terms of packaging it together to make it easier to use and install. The only other differentiation between these companies aside from these value-added enhancements consisted of the varying quality of technical support services they offered to their customers, and more importantly, their relative marketing savvy and the resulting demand they could generate from the audience of current and potential Linux enthusiasts.

Linux software and hardware companies are competing against established giants in the IT sector, companies such as Microsoft, Sun, Compaq and Hewlett-Packard. These larger companies have spent billions of marketing dollars and many years of networking to develop formidable fortresses of third-party middlemen and distribution channels to get their products out to the end user. But with the advent of the Internet, these long-established distribution channels are now beginning to unravel. Many of the leading software and hardware companies are finding that their existing agreements with distributors present a barrier in their abilities to sell their own products directly to the end-user over the Internet. This recent flux and upheaval in distribution channels is of significant advantage to the new players. The Internet is making it possible for these companies to sell and market their products directly to an international audience of potential buyers, but getting noticed in all the noise is still the necessary prerequisite to stimulating demand. This is where the larger linux content and community sites serve an increasingly central role as the largest virtual marketplaces where the market of buyers and sellers congregate, and it explains why the majority of the largest independent content sites have been acquired within the first year of the first Linux IPO.

Only a few of these hardware and software companies have been financed with adequate capital to enable them to expand rapidly and gain market share as quickly as possible. These companies have begun aggressive acquisition campaigns to add value and differentiate themselves from the competition. For example, within a couple of months of receiving their IPO proceeds, Red Hat announced they were purchasing Cygnus Solutions, a provider of GNU open source development tools for embedded systems, for $674 million (based on share price at the time of the announcement). They also acquired Hell's Kitchen Systems (developers of a credit card verification system) in January and the transaction, based on Red Hat's share price at the time, was valued at $90 million, even though Hell's Kitchen was a tiny company employing only five people. In July they acquired WireSpeed Communications (another embedded systems developer) for approximately $30 million.

VA Linux has also been actively buying up companies. In February they announced they were acquiring Andover.Net in a stock transaction valued at almost $1 billion at the time of the announcement. Andover was a strategic investment in that it supplied VA Linux with instant ownership of the largest Linux community on the web. Currently Andover.net serves about 60 million page impressions per month, and their largest properties include Slashdot.org, which is the largest news and community site frequented regularly by this targeted audience and Freshmeat.net which is a leading online support site for Linux and Open Source. VA has also invested heavily in Linux.com, another site dedicated to the worldwide audience of serious linux users and developers. Since then, VA Linux has also acquired TruSolutions for approximately $200 million (TruSolutions was a competing developer of Linux servers and was rumored to be headed for an IPO) and NetAttach, a developer of storage solutions for Linux.

Internet.com has also been a very early and active player in the linux space. Internet.com is a news and information content site for IT professionals. Their goal is to be the number one news and information site for technical and business professionals in the IT sector and in this goal they compete with other public companies such as CNET and ZDNET. The Linux and Open Source communities represent the fastest growing segment of this larger community and Internet.com has been quietly buying up many of the leading Linux content sites since last year. Soon after their IPO they purchased LinuxToday.com in October of 1999. LinuxToday was the second most popular news site for Linux enthusiasts, after Slashdot.org, and it had five million page views and almost 400,000 monthly unique visitors at that time. That same month, Internet.com also purchased LinuxCentral.com which was one of the three largest e-commerce sites focusing on selling hardware, software and other products geared exclusively at the Linux and Open Source community and which competes with other vendor neutral e-commerce sites for Linux products such as LinuxMall.com, TheLinuxStore.com and elinux.com. In December, they followed up with purchases of SharkyExtreme.com (which at the time had approximately 10 million page views a month and whose readership is composed mainly of technology professionals) and LinuxStart.com, another popular content site frequented by the Linux community. In January they purchased JustLinux.com. and in February they followed up with the purchases of Linuxnewbie.org, PHPBuilder.com and LinuxProgramming.com. In March they bought LinuxApps.com, a leading download site for Linux developers. By August of 2000, their total monthly unique users were 2.1 million.

Several other players have recently acquired Linux-related properties. The following table shows some of this activity over the past year.



Buyer ---------------------------> Acquired Companies
Atipa Linux Solutions---------- Enhanced Software Technologies
Applix-------------------------- Cosource.com
Cobalt Networks----------------Chili!Soft and Progressive Systems
Corel ----------------------------Newlix (30%) and Linux Force (30%)
Dell ------------------------------ConvergeNet Technologies
EBIZ Enterprises----------------- LinuxMall.com
Internet.com---LinuxToday, Linux Central, SharkyExtreme, Linuxnewbie
Lineo-----------FirePlug Computers, Moreton Bay Ventures, Zentropix
LinuxCare------------------------ The Puffin Group
Motorola------------------------- Metrowerks
Red Hat--------Hell's Kitchen Sys.,Cygnus, WireSpeed, Bluecurve, C2Net
Sun-------------------------------StarOffice, Cobalt Networks
Tucows.com--------------------- Linux Weekly News
TurboLinux ----------------------Lynx Real-Time Systems
VA Linux---Andover.net, Linux Hardware, TruSolutions, NetAttach
ZDNET (to be acquired by CNET) --LinuxDevices.com



Likely Candidates for Acquisition or IPO: Who is next?

Who is next? In the following paragraphs we select a handful of other emerging but still private companies in the open source arena who are ripe targets for acquisition or an IPO over the next year.

Continued in Part II.


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The image above is "Penguin Diving" by Artist Unknown