How Low Can Public Open Source Companies Go?
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.