Three Questions After the JBoss Acquisition
April 10th, 2006 | by PHC |
The suspense is over. Hats off to Marc Fleury for this very nice exit. Red Hat’s acquisition raises some interesting questions for the enterprise software industry as a whole.
(i) Is JBoss overvalued?
Red Hat will pay anywhere between $350 and $420 million for a company with an estimated $60 million of revenue and apparently no profits. Subscription revenue is typically valued at 5X to 6X sales, while professional services (including training and certification) are valued at 1X to 2X sales, which seems to leave a very nice premium. On the other hand, Red Hat is valued at 17X sales and the deal is 60% stocks. From Red Hat’s standpoint, this acquisition is diluting profit, but growing sales by 20% by swapping only 4% of its equity. That doesn’t seem too bad for Red Hat, especially given that Oracle was ready to pay an even higher price. The first joint earnings call next June will be critical to help the market decide.
(ii) Will Red Hat’s and JBoss’s combined strengths reinforce the OSS infrastructure “stack” and is MySQL next?
From a sales and market share perspective, JBoss will certainly benefit from Red Hat’s penetration in the enterprise market. Red Hat might also benefit from at a technical level by strengthening the Linux’s kernel performance for enterprise applications. It also fits the “going up the stack” strategy. Regardless, MySQL remains a more obvious acquisition target – albeit a more expensive one (and by no mean out of the picture yet) – to strengthen the LAMP core.
(iii) Will the business of free IP be ever lucrative in the long term?
Open Source Software companies currently commend high valuations because they dramatically disrupt traditional business models. However, do revenue models solely based on derivatives and services really provide a fair return on IP? Some estimate that JBoss’s market share in the Application Server space is equivalent to $300 million of license revenue. Giving away that Intellectual Property to commoditize a market is a great disruptive strategy to get in, then what? From my perspective, the real opportunity derived from OSS is not in OSS but in Software-as-a-Service, because those applications leverage the OSS stack, while monetizing their own IP and community.