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Open source impact on software M&A

By Dirk Hohndel (Intel) (21 posts) on February 15, 2007 at 8:18 am

Larry Augustin chaired a panel on "The Impact of Open Source on Software M&A" at the LinuxWord Open Solution Summit in New York.

I thought this was a fascinating topic - open source has so fundamentally changed the software world and many (most?) software startups these days are at least partly involved in (or using) open source. And finally, for software startups, M&A seems to be the typical exit these days (the pre-announced IPO of MySQL not withstanding). So I was surprised to see only about two dozen attendees in the room...

The panelists (from Black Duck, Palamida, IBM Ventures and DLA Piper) covered the different sides of the issue - two consulting companies dealing with open source risks, a VC and a law firm focused on M&A.

And the issues that were raised were really quite interesting. Many licenses used for software today are not assignable, so if you buy a software company that based their business on such software you may have to "re-aquire" that software. Sounds easy: download the software again. But what if the original version isn't avaialable anymore? What about internal changes that haven't been tracked since the download?

Software companies today use a large array of software components that they download from the internet - under a variety of licenses. And the degree of legal analysis done while assembling these components is typically minimal. With interesting consequences once you do due-dilligence. From products that are built from components that have incompatible licenses to the most-feared "open source contamination" of the comany's IP.

And the value of companies is suddenly less in the hard assets and more in the people that work there and the viability of the community around them. That sounds like the reality in any acquisition. But think about it: with proprietary software, even if the key developers leave, you still own the IP and can start ramping a new team. In open source, the developers can turn around and use the exact same software to start a new business that competes with you. Which means that employee retention suddenly becomes the biggest challenge in an M&A deal.

And this is the piece that really was the biggest "a-ha" for me, as it means that working as a developer in an open source startup (and becoming a key contributor) gives you a better chance to really participate in the success of the business than in a proprietary software company. I don't think this was the main message that the panel wanted to leave us with - but to me it was a very interesting point to bring home.

Categories: Open Source

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