How Low Can Public Open Source Companies Go?

by Sam Dean - Nov. 19, 2008Comments (8)

While I remain in agreement with many observers who see the economic downturn as potentially very positive for open source, I have to wonder whether we're going to see some of the leadership open source companies swallowed up in all the financial carnage. Red Hat, Novell, and Sun Microsystems are all companies that I'd like to see continue their open source leadership without the meddling of huge corporate parents, but one has to wonder how cheap these companies can get in the public market before their independence is threatened.

The stock market just closed a few minutes ago. Red Hat's stock dropped just shy of 10 percent on the day, and Novell's did too. Both stocks got hammered far harder than the five to six percent declines for the various market indexes. Sun fared worse, dropping nearly 12 percent for the day. Sun and Novell both sell for under $5 a share, and Red Hat sells for under $10 a share.

These are just numbers for today, though. Sun's stock was in the 18 range at the beginning of the year, and now the shares are at 3.27--a beating far worse than seen in the overall stock market. Novell's stock has fared slightly better in percentage terms, but not well at all.

Red Hat began the year posting rosy financial results, with new CEO Jim Whitehurst much heralded. Its stock is down more than 50 percent now. Of the three companies discussed here, only Sun has a market capitalization above $2 billion--barely. Red Hat and Novell have market caps well under that at this point--hardly above what eBay paid for Skype a few years ago, and Skype was a single-application company that wasn't even profitable.

If this continues, it's almost a certainty that one, some or all three of these open source leaders will be acquired, either in part or in whole. Especially in the case of Red Hat, the underlying earnings, cash position, retention of top 25 customers, and overall prospects remain very rosy, despite the carnage.

The 800-pound gorillas out there won't watch that disparity between positive underlying performance and the diametric opposite of market love forever. I hope we don't see any of these leading, innovative companies get swallowed up by a bureaucratic behemoth.

Even worse, let's hope we don't see what has happened numerous times before in the technology industry: a Goliath buying a David for the sole purpose of shutting it down. If Red Hat's market capitalization falls very much more below the $1.7 billion+ point that it's at, I could easily see Oracle buying it, retaining pieces of it, shutting down parts of it, and changing the open source landscape forever.

Microsoft would face substantial regulatory issues if it pursued these companies, not to mention bad PR, but the company does have a mountainous pile of $43 billion in cash, and could make various types of plays. Let's hope the valuations of these public open source players improve--and quickly.

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by Jack G on Nov. 19, 2008

Great point. In this market, there is bound to be a ton of consolidation. There are already a few PE shops that have begun to dramatically increase their holdings in Sun. There is talk that they may go private too, and try to battle the storm. The cash on hand that Sun has is still a very hearty chunk of change, with the tragedy being that they still generate almost $1B a month in sales. Sure, they took a sizeable writedown in Q2 (calendar Q4 is their Q2), but they are still providers of fine technology. The daunting challenge for the entire industry is how to get the show going and manage expectations appropriately - a hard thing...

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by an anonymous user on Nov. 20, 2008

Sun is done. I think Jonathan Schwartz's days are numbered - look at glassdoor - he's hanging on by a thread - 38% approval rating! As sad as it is, its over and Yahoo is next in line. Nothing to do with Open Source - just bad management and lack of vision...

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by an anonymous user on Nov. 20, 2008

Didn't Oracle do an analysis in 2006 that concluded that any price was too much for Red Hat, because they could just take any technology for free. If they still believe that, then Oracle is not a take over candidate.

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by Vikram on Nov. 20, 2008

look at the bright side - who ever though the day would come when Red hat shares are worth twice that of GM or Citi ?

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by an anonymous user on Nov. 20, 2008

Yes but Oracle have done exceptionally poorly with their Oracle Linux. I admit that Redhat at 300$ a share is ridiculous but at what it is trading at now, why not? It's all about the name and reputation. Many CTOs won't even consider anything but Redhat for Linux deployments (ok, maybe Novell). I work for a hosting company and most of our customers MUST have Redhat because that is what the apps they want to run are certified on. Many decision makers see a cheap (but supported) PHP/Zope/Java app that satisfies their needs, and don't care about a 400$/y cost for RH support.

Oracle Linux just didn't take. Redhat even admits (sorry, don't remember the link) that CentOS is but a stepping stone to "proper Redhat" support. I think it would make HUGE sense for Oracle to buy Redhat, at least for a bargain. Don't forget that Redhat is also in the black, and with an Oracle Redhat brand they could make some pretty big inroads.

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by an anonymous user on Nov. 21, 2008

[QUOTE]If Red Hat's market capitalization falls very much more below the $1.7 billion+ point that it's at, I could easily see Oracle buying it, retaining pieces of it, shutting down parts of it, and changing the open source landscape forever.[/QUOTE]

That will quite simply never happen. I mean, of course Oracle (or anybody else) can buy Red Hat out-right at some attractive price-point depending on it's share value. However, that does not mean Red Hat will die.

You must realise that all the code Red Hat uses is Free Software. You must also realise that all of Red Hat's employees are with Red Hat because they believe in Free Software and in Red Hat as a vehicle for propagating it.

If whoever acquires Red Hat changes it significantly, they will indeed be changing the very ethos of Red Hat - that which makes it's employees stick with it. What happens next is very simple - every employee that believes in the ethos of Red Hat will walk away. And there will be another Red Hat. Maybe not the same name - but most certainly the same ethos.

And of course customers will change to this new Red Hat because this new Red Hat will contain the people that they've come to trust.

Which will mean that whoever acquired Red Hat in order to shut it down will have most certainly lost - money and talent - and failed.

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by an anonymous user on Nov. 21, 2008

@anonymous

[QUOTE]Didn't Oracle do an analysis in 2006 that concluded that any price was too much for Red Hat, because they could just take any technology for free. If they still believe that, then Oracle is not a take over candidate.[/QUOTE]

This is very true. All Red Hat is, is a legal entity - a corporate shell. This shell houses a set of projects and a set of people behind said projects. All of the projects do not actually belong to this shell - they are Free Software projects. All of the people employed by this shell are actually just people behind those projects.

When another legal entity/corporate acquires Red Hat, all they actually acquire is this legal entity called Red Hat. They don't acquire any of the projects as they were never owned by Red Hat anyway. They don't acquire a guarantee to keep the people behind said projects (and dissociate said people from said projects) - those people are free to CONTINUE BEING ASSOCIATED WITH SAID PROJECTS.

Therefore, what another legal entity/corporate acquires is just an empty shell. No matter how much (or how little) they pay, they're still paying too much because they are getting nothing in the end.

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by Sue E on Apr. 14, 2009

What I feel is sad here is the fact being Red Hat, although it may be a good thing, it is something that was built on the heels of someone else which they are making money on and not giving them a dime of.

Now, what might be interesting is if Oracle were to step up and put some investment into Red Hat as they could make it into something more than what it is now. So I think the remark above needs to be corrected. Whoever decides to purchase can continue with innovating and provide something that will help small business grow their profits.

As an information systems operator and a UNIX and MUMPS programmer I am now a the president of my own small business. I have experienced exactly what I am about to explain.

I have been in multiple situations during project development when during the point A to point B something amazing occurs which was not anticipated but got me to say AHA and talk to team mates about a discovery. Now that I am running my own ship, it's even more exciting when I experience moments like that.

Before you make your next judgment on software, remember that innovation will be here with or without the doubting Thomas' in the world. The question to ask yourself is how worth is discovery to you as it could be the answer to more than just technology.

Just a few thoughts to consider. I certainly am while I invest time in my Doctorate.

Regards,

SLE, MBA, BA., BSMIS

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