Monday, February 19, 2007

It's the People, Stupid

Last Thursday I participated on a panel at the LinuxWorld OpenSolutions Summit in New York called “The Impact of Open Source on Software M&A” (see an overview of the panel here).

Attendees at the conference were mostly software developers and distinguished industry analysts, and the discussions were stimulating. One of the reasons why this panel was a success was the skill of our moderator, noted investor Larry Augustin. He’s got skills!

The members of our panel discussed many interesting topics, including the business impact of GPL v3 and various other open source projects, a subject that regular readers will know is near and dear to my heart. And while we agreed on many subjects, there was a significant difference of opinion on one topic – changes in valuation in M&A due to OSS.

The question we debated is this: Does the acquisition price for a company change simply because that company has OSS components in its code base? Our experience at Black Duck Software, reinforced by large acquirers such as Oracle, SAP, and many others, is no.

It's true that the purchase prices of acquisitions which took place in the early days of open source may have been affected by the potential presence – whether known or accidental – of open source, resulting in a risk-adjusted price. But those days are largely over. Now it's the terms of the acquisition that change – especially the representations (“reps”) and escrow (which include a plan to remediate the code).

The truth is that today's companies with an open source model are acquired for reasons other than their code.

At the end of the day, software code is just algorithms, functions and logic. Acquirers now see that a company's most valuable assets are the creative people who make magic with those bits and bytes. As my fellow panelist Deborah Magid (Director of Software Strategy at IBM Venture Capital Group) said (and I’m paraphrasing): IBM acquires companies for their technology, community, and other reasons – but especially for their people.

When one considers their effective acquisitions of Rational, and Tivoli, GlueCode and others, it's clear that IBM is a company that knows their stuff.

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