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Open Source, Big Deal: MySQL's $1 Bil Payday

Sun Microsystems' $1 billion purchase of database company MySQL was more than just a hefty price tag for an open-source software company. Analysts call it a fresh sign of the business model's growing clout and maturation.

The acquisition, announced last month, would be the biggest ever of any open-source software company, says the 451 Group, a research firm. The second-largest occurred in the tech-boom days of the late 1990s, when open-source operating system seller Red Hat (NYSE:RHT) RHT used $675 million of its highflying stock to buy Cygnus Solutions'.

'MySQL is one of the most well-known open-source projects in the world,' said Raven Zachary, a 451 Group analyst. 'It's one of the most significant (open-source) acquisitions ever.'

Sun's JAVA purchase of MySQL should help make 2008 another big year for acquisitions in the open-source market. Acquisitions of open-source companies totaled 30 in 2007, 451 Group says, up from 22 in 2006 and 15 in 2005.

Until even just a few years ago, some saw open-source software as the playground of geeks and wide-eyed entrepreneurs.

Open-source software -- unlike traditional commercial software -- is built cooperatively and is freely available for anyone to use, improve and pass on to others. Companies typically make their money by providing service and support for open-source software projects. Often, the companies devote many of their own engineers to helping develop the software.

This has made for a business model that creates dependable software at a lower price, wooing users away from traditional software vendors such as Microsoft (NASDAQ:MSFT) MSFT. And because many software versions are freely available to try, companies can test the programs before signing up for additional service and support.

Growing Appeal
Analysts say open-source companies are gaining the sales and customer reach to attract larger acquirers. Buyouts could continue at the expense of initial public offerings, because many open-source entrepreneurs just can't turn down big-dollar offers.

In September, Yahoo (NASDAQ:YHOO) YHOO paid $350 million for open-source e-mail software vendor Zimbra. A month later, business software company Citrix Systems (NASDAQ:CTXS) CTXS shelled out $500 million for virtualization software maker XenSource, which competes with traditional software vendor VMware VMW.

An open-source company fetching $1 billion is a big step for the industry.

'It's huge,' Zachary said. 'It's a psychological number.'

Sun, which gained a fast-growing database company and a foothold with potentially new customers, already has been putting more emphasis on open-source software. It recently opened up its own operating system, Solaris, under an open-source license.

MySQL and its popular database software are darlings of the open-source community, being a key part of a software package that's used around the world with operating system Linux. Zachary estimates the company did roughly $45 million in sales in 2007 and was on track to post about $70 million in 2008.

Many expected the company to go public within the next year, a move that might have given open-source software more mass-market exposure.

But Kevin Harvey, chairman of MySQL and general partner at early backer Benchmark Capital, says the acquisition was too good to pass up. Harvey's firm also was an investor in XenSource and Zimbra.

'Clearly, (MySQL) could have gone public and remained independent,' he said. 'This was very attractive financially, even compared to an IPO. I think this legitimizes both open-source and MySQL and (will)help it move into the enterprise faster.'

Zachary estimates the valuation at 15 to 20 times annual sales -- a hefty multiple, though still far less than the 500 multiple XenSource got. Microsoft, for example, is offering less than 10 times annual sales in its $44.6-billion bid for Yahoo.

Zachary says venture capitalists that began to load up on open-source companies earlier this decade now see their companies maturing enough to attract buyers. He says the trend could taper off as open-source investments slow.

But MySQL's Harvey says open-source companies are getting the customers and growth they need to attract buyers on their own -- making decisions without heavy influence from VC investors.

'There are a wave of them that are maturing,' he said.

But not all open-source companies are hoping for a big-pocketed acquirer to make their fortunes. Customer-relationship management software maker SugarCRM and content-management software firm Alfresco Software are angling for initial public offerings.

SugarCRM CEO John Roberts says his company is growing quickly, and he expects to go public within two years.

He says he was disappointed when he heard MySQL agreed to be acquired rather than go public.

'Ultimately, it was a great price,' he said.

Because of MySQL's growing momentum, a publicly traded stock could have shown investors that open-source software is a healthy, growing business.

Red Hat, which went public in 1999, is the standard-bearer for the open-source segment. Linux company Novell NOVL another big name in open source, has struggled with sluggish sales growth.

Software security firm Sourcefire FIRE, which went public early last year, is trading below its IPO price.


More IPOs Wanted
John Powell, chief executive of Alfresco, also wants his company to go public in the next couple of years. He says the payoff for his current shareholders would be better over the long run than a one-time payout from an acquisition. He says MySQL could have helped smooth the way with an IPO.

'Open source needs more evidence on the public market that the compa nies have a long-term future," Powell said. "There's not too many data points.'

Yet Zachary says all the talk about IPOs is often a way for companies to boost their valuations. He says the right price can be too tempting for many companies.

Harvey says the industry can expect more M&As. 'We're more likely to see acquisitions over initial public offerings in the next couple of years,' he said.