Red Hat's Latest Acquisition Brings Multiples Back to Earth

Red Hat (RHT) has re-established the multiple for acquiring so-called open source software [OSS] companies with its September 4, 2008 acquisition of Qumranet. In the process, it looks like the price to acquire an open source company is becoming more like the cost of acquiring any other small, hot software company. This further confirms the way open source has merged into the software industry in general. (I use the words “so-called” to modify open source because from a market research perspective, there really is no such thing as an OSS company. Open source companies are a figment of so-called open source company PR folks.)

I have been following the multiple trend primarily since Red Hat’s acquisition of JBoss in April 2006, at what might have turned out to be as high as 100 times revenue. At the demonstrable peak in October-December 2007, Citrix (CTXS) acquired Xensource and Yahoo (YHOO) acquired Zimbra for around the same multiple. By April of 2008, Sun (JAVA) “only” paid 20x annual revenue for MySQL. Although there was no public information available, I made some estimates concerning Oracle’s (ORCL) acquisition of Innobase and Sleepycat, IBM’s (IBM) acquisition of Gluecode, the Iona (IONA) acquisition of LogicBlaze, and other deals that happened before and after these highly publicized transactions.

To be fair to Citrix, it believes it paid about 10x 2008 revenue for Xensource and we are not able to compare revenue-per-year totally fairly in all these acquisitions because the acquired companies were all private. Also, acquisitions such as the Progress (PRGS) acquisition of Iona are not considered in this analysis because Iona had only recently begun to embrace open source terms and conditions.

With the Red Hat/Qumranet acquisition, the multiple appears to be down to about 5x annual revenue. This is the range that the next OSS players in line—for example, Alfresco, Compiere, Groundwork, Jaspersoft, Talend, etc.—should be thinking about.  And it looks like, unlike in 2006 and 2007, they probably have to actually be posting some revenue..

In addition, with this acquisition it also looks like Red Hat is finally putting together the new desktop strategy that has been hinted at for a year.

Comments

[User 255819:]

How do you figure there's no such thing as an Open Source company? I can think of a bunch of them, many of which you yourself mentioned.

2008 Sep 04 02:30 PM

[Sacha Labourey:]

Hello Dennys,

I enjoy reading your posts.

Still, I am not sure where you got some of your numbers...

Anyway, only looking at revenues for valuating a subscription-based business in a high growth period makes very little sense, that's why those acquisitions are usually based on bookings (single year bookings preferably), not revenues.

Reasoning? If such a subscription-based company would have no-growth at all during the next 12 months, their SY-bookings would be equal to their revenue. BUT, if such a company would have a high growth Y-to-Y (like 100%), revenue would be much lower than their SY-bookings - which is the case for most of the companies you list in your article.

This is a cash-flow business model - unlike some software vendors with a strong percentage of license-based bookings - mostly recognized as revenue upfront, not over-time.

This "trailing" effect of revenue vs. bookings is something subscription-based companies constantly have to re-explain to the street, used to deal with more traditional license-based software vendors.

But I guess you already knew all that :)

Cheers,

Sacha Labourey

Disclaimer: while I work for RHT, the posting above is my own and don’t necessarily represent RHT’s positions, strategies or opinions.

2008 Sep 04 02:38 PM

[Dennis Byron:]

User 255819 -

I say there is no such thing as an open source company because open source is a culture and a set of license terms and conditions, neither of which can be used to define a "company," especially one you would want to invest in (which is the point of SA after all).

Every so-called open source company I have looked at (as opposed to a group such as the Apache Software Foundation or the Mozilla Foundation) looks just like every other software business I have ever looked at; it just recognizes its revenue slightly differently (as explained by Sacha in the other comment above). I say slightly differently because even most of the so-called non-open-source software companies (e.g., SAP, Oracle, etc.) recognize most of their "software revenue" as subscriptions in the same way Red Hat does.

Sacha -

I understand your logic but I'm still a Jerry McGuire guy. When I said "we are not able to compare revenue-per-year totally fairly in all these acquisitions because the acquired companies were all private," I could have also added the disclaimer--that I use in my reports--that a total subscription-based revenue model understates market share. But I didn't think it mattered for this analysis because all the companies acquired kept their books this way, no?

So--if I used your method--the multiples are still going down dramatically, just from different highs.

(As for source, I'll send you an email.)

2008 Sep 05 09:37 AM

[cameronm:]

I think the JBoss multiple was far lower. I think it was more like 20. I think the Qumranet multiple is a lot higher than 5.

2008 Sep 05 04:14 PM

[Dennis Byron:]

Cameron

Thanks for the comment. As Sacha describes above, the idea is to try to figure out what the acquired company did or will do the year after it was acquired. As the blog post notes, lining up the years will never be perfect.

We will never know on JBoss but Red Hat SEC filings indicate its revenue actually declined after it was acquired. As for Qumrannet, the 5X is simply based on the Red Hat press release of September 4, 2008 announcing the deal.

Bigger point: the trend line has gone from unbelievably high to a more normal multiple traditionally assoicated with any young hot software company.

-- Dennis

2008 Sep 05 05:23 PM