Open Source Comes Under Spotlight As IBM Eyes Sun

International Business Machines Corp.'s (IBM) potential acquisition of Sun Microsystems Inc. (JAVA) may prompt other big technology companies to take a fresh look at buying companies making open-source software, software that can be freely modified.
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Last week, The Wall Street Journal reported IBM was in talks to buy Sun, a struggling Silicon Valley pioneer, for as much as $8 billion. The Armonk, N.Y.-base technology giant covets Sun's broad portfolio of open-source software, much of which is used to run servers at corporate data centers.

Santa Clara, Calif.-based Sun developed the popular Java code, a building block for the growing number of applications that run over the Internet. It also developed MySQL, an open-source database.

The potential deal, which neither IBM nor Sun have commented on, could set off a host of acquisitions of open-source software companies by technology giants such as Hewlett Packard Co. (HPQ) and Oracle Corp. (ORCL), analysts say. That's because these companies need open-source software to power their growing array of "cloud computing" products, applications that are accessed by customers over the Internet. Many companies believe cloud computing will drive the next leg of growth for both the hardware and the software industries.

Open-source operating systems, such as Linux, have gone from being niche players a decade ago to controlling a significant portion of the server market. Linux-based servers accounted for 13.6% of all server revenue in the fourth quarter of 2008, up one percentage point from the fourth quarter of 2007, according to research firm IDC.

"Larger vendors, such as Hewlett-Packard Co. (HPQ) and Oracle Corp. (ORCL), will be shopping around because the cloud and the technologies which support the cloud are what is going to enable them to plan for the future," said Theresa Lanowitz, founder of Voke Research. Lanowitz said open-source support firm Red Hat Inc. (RHT) and open-source server maker Novell Inc. (NOVL) could be acquisition targets.

Already Red Hat shares have begun to move like a potential takeover target.

On Monday, shares of the Raleigh, N.C.-based company soared more than 10% as speculation mounted Redwood City, Calif.-based Oracle might be interested in buying the company, which offers support services for the Linux open-source computer language. Linux has seen rapid growth in corporate computing and Oracle in 2006 issued its own version of Linux, saying it would undercut Red Hat's pricing, in a bid to win more of this market.

"It would make sense for Oracle to own Red Hat ultimately," Katherine Egbert, an analyst at Jefferies & Co., said in a research note. Egbert added that the timing might not be right yet for a deal.

Oracle declined comment. Red Hat didn't respond to requests for comment. Red Hat's shares closed Monday up 9.9% at $16.37. Novell's shares closed up 7.5% at $4.43.

IBM's reported interest in Sun demonstrates that established technology companies recognize the importance of open-source software, which is more compatible and cheaper than proprietary software, said Miko Matsumura, a former Sun executive who is now deputy Chief Technology Officer at Software AG. That makes it valuable because technology companies can integrate it with the systems of their clients when providing help desk and outsourcing services, he says.

"This signifies a maturation of the open source industry," Matsumura said. "It shores up the thesis that open source and professional services are a good match."

While open source is acknowledged to have a valuable place in corporate computing, generating revenue from products which can be freely modified is difficult, and analysts say competing with big vendors like IBM, Microsoft Corp. (MSFT) and Oracle, which generate revenue from product sales and can afford to devote more resources to big clients, is tough.

Matsumura and others said the bear market had created values in the open source industry. Red Hat's stock is trading 22% lower than a year ago, while Novell has lost half its value over that period. Privately-held companies, especially those backed by venture capital, might also be open to deals, they said.

Other open source software companies include SourceForge Inc., SpikeSource Inc. and Vyatta Inc.

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BY Jessica Hodgson
Source：The Wall Street Journal

Jessica Hodgson - Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com

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