Linux Deal May Be an Early Tell for Broader Tech Consolidation

The market's awash in rumors this morning. The juiciest, if most improbable, has Hewlett-Packard (HWP) buying, or maybe merging as an equal with Compaq (CPQ). Seems unlikely to me; there are few synergies there and lots of antitrust problems -- why would H-P want to buy Compaq's problems?

But with Compaq's price so far down, stories like this are probably inevitable. And these days, who knows?

Another story out this morning is very real: VA Linux (LNUX) is buying Andover.Net (ANDN). I'm not sure this one makes any more sense than the H-P-Compaq story, but it's true -- no rumor here -- and it may be the harbinger of bigger things to come.

This morning, VA Linux was down 6 7/8, and Andover.Net was up 10 5/8. Looks like a tidy, early cash-out for Andover.Net founders and investors.

Both companies benefited hugely from their same-week IPOs last year, of course. VA Linux has the better record: priced at 30, touched 320 on opening day (Dec. 9), closed that day at 239 1/4 -- an almost-700% first-day gain -- then sagged to Wednesday's close just shy of 137. Andover.Net priced at 18 and closed at 90 on Dec. 8, and had sagged to around 27 earlier this week before rumors started circulating about a VA Linux buyout.

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I think both valuations are out of line with reality: VA Linux just isn't a $4 billion-plus company, and Andover.Net sure as heck isn't an $800 million-plus company, which is its value according to the terms of VA Linux's offer of $3.81 in cash and .397 share of VA Linux per Andover.Net share.

What do we have here? VA Linux mainly builds inexpensive to moderately priced Intel (INTC) x86-architecture preloaded Linux boxes for corporate customers. And Andover.Net runs the Slashdot.org, Freshmeat.net and Mediabuilder.com sites. Big deal.

But hey, whatever I may think, VA Linux has validated the Andover.Net market price, so my thoughts are by the board. The Linux market is far from being worth as much as the share prices of these two companies, plus Red Hat (RHAT), suggest -- and I think it may never be worth that much.

But these are heady days for Linux. This week's Linux World Conference and Expo in New York continues to focus attention on the Linux marketplace. The news at the show is bubbly, with the Trillian consortium announcing they have their beta code for a 64-bit native Linux for Intel's new Itanium CPUs ready; with IBM (IBM) announcing it's about to start shipping Netfinity servers and ThinkPad notebooks with preinstalled Linux; with IBM's ViaVoice voice-recognition software now available for Linux; with NetObjects' (NETO) easy-to-use Top Page Web-site-building software now in beta on Linux; and much more.

So the VA Linux-Andover.Net deal was announced at a propitious moment.

We'll see more consolidation in the Linux market, but more interesting, I think, is where this deal points for tech consolidation generally.

The 'New' Consolidation

I could argue that the notion of "consolidation" as something separate from day-to-day business is an almost obsolete idea, since stocks in general, and tech specifically, seem as much fueled these days by M&A activity as by innovation, new-product announcements, customer wins and the other, more conventional stock-market levers.

But I won't make that argument, because this is turning into the Year of Consolidation in tech, and I think the pace is going to not just continue, but accelerate. Too many companies, too much fragmentation, too many shaky valuations, too much market confusion and, just maybe, not enough customers.

Tech has turned into a winner-take-all microeconomy, and even being a strong No. 2 isn't much fun anymore. Look at the PC business.

Even the router business (where, I will concede, technical advances have created transient profitable niches for the truly innovative) seems headed down that path.

Consolidation is happening for the obvious and usual reasons -- economies of scale, real and imagined synergies, efficient use of capital -- but also in part because of a new way of thinking about growing companies.

I like Cisco (CSCO) CEO John Chambers' take on this and on what's coming in the year ahead. In paraphrase:

We have to change how we see M&A activity in tech, because what it's really become is just another form of R&D. You develop some things internally, of course, but it's a lot more efficient to watch for interesting developments at other companies, and buy the best of them.

"R&D through consolidation" is going to be an extremely important idea in tech over the next couple of years.

I don't want to launch yet another round of rumormongering by suggesting possible mergers in the wings. Indeed, given the pace at which deals are suggested, explored, negotiated and closed these days (taking a long weekend to craft a deal is so old-fashioned!), real deals could emerge faster than rumored ones.

I suspect that a lot of us are going to, in effect, become part-time arbitragers this year, watching for potential acquirees and picking up shares before the announcements we expect -- then buying more shares, in true arb form, after the deals are announced, making our bets on whether the deals will hold.

Frankly, I don't much like that. I've made good money over the years on the occasional arb play -- and lost some, too -- and I can tell you it is a harrowing, unsettling experience. I like to leave arbitrage to the arb pros.

But this year, spotting potential acquisitions is going to have to be part of our arsenal.

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