It’s Back: Virtual Capitalism
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Who am I to second guess it. Virtualization is hot. In the past week VMWare went public closing at the end of the first day with a $20B market cap and Citrix agreed to buy XenSource for $500M.
WOW! This kind of activity make the bubble days pale in comparison.
I mean okay VMWare, hot company, fast top line revenue growth but also accelerating expenses. In 2006 the company reported revenues of $704M and net income of $87M or 12% of revenue. In 2005 VMWare reported $387M in revenues and net income of $67M or 17%. So revenue was up 82% but net income is declining on higher spending all around. If the company continues to grow revenues again this year at 82% the current $20B market cap means a 28x trailing twelve months revenue and a 15x current run rate revenues.
Compare VMWare to the Bladelogic IPO or the Opsware acquisition by HP and it looks pricey by comparison. But, given the market is so starved for growth stories it kinda makes sense.
But, XenSource is another story. The company just started shipping product in January of this year and according to Business Week’s Aaron Pressman and 451’s Rachel Chalmers, XenSource had less than $1M in revenue over the past year. That means Citrix paid 500x trailing 12 month revenues. WOW! Okay yeah Citrix needs a new game, they’ve been looking for their 2.0 story forever. But I mean anyone could pick up Xen and integrate it. It’s open source for crying out loud! Is there really $500M worth of value in the XenSource management tool for the Xen Hypervisor? Citrix seems to think so.
I think this points more to the continuing trend of acquiring hot technologists not so much technologies. Despite what Matt Assay writes Tim O’Reilly may just be right on with his assessment of Open Source companies eventually being bought by proprietary companies. These acquirers are not buying the software or the licensing model, but the people. The licensing model doesn’t matter. Customers pay for innovative ideas that solve problems easier, cheaper and faster and they’ll buy it in almost any form if it works better than what they’ve got.
Sure Cirtrix paid a whole lot. But they might be right about owning the brightest minds in virtualization software. If virtualization is the future and they captivate the biggest thinkings perhaps 500x is not too much?
