Subject: Re: Why do Linux box vendors thrive?
From: Ian Lance Taylor <ian@airs.com>
Date: 9 Dec 1999 20:42:54 -0500

   Date: Thu, 09 Dec 1999 21:52:50 +0000
   From: Crispin Cowan <crispin@cse.ogi.edu>

   > I'd say that VA's future is either to be bought, or to be stuck in a
   > small niche market forever, or to convert to a specialist driver and
   > configuration shop contracting to the PC vendors and/or the hardware
   > manufacturers.  I think the only way they could get as big as Dell
   > would be if Dell were asleep on the switch on the Linux thing, and
   > they're not.

   Or perhaps to take their massive market capitalization and buy someone smaller
   ... like Compaq or Gateway.

   No, I'm not kidding.  Do the math.  VA Linux currently has a market
   capitalization of $62 BILLION (260 million shares, $240 each).  Compare that
   with "little" companies like Compaq ($42 billion,  http://www.lwn.net/stocks/ )
   and Gateway ($21 billion,  http://quote.yahoo.com/q?s=GTW&d=t ) and it becomes
   conceivable that VA could buy up a major 2nd tier PC manufacturer, making both
   Linux and VA a force to be reconed with.

The market cap is indeed insane, and your suggestion is an interesting
one that I hadn't considered.

Remember, though, that the market capitalization isn't literally money
in VA's pocket.  VA can't use it to walk into the stock market and
start buying shares in Compaq.  They no longer own the stock that they
sold, and most of the stock they didn't sell in the IPO is probably in
the hands of founders, VCs, and employees who would probably prefer to
cash in one way or another rather than spend it on acquisitions.

VA presumably has retained some stock, and they can write new stock
any time they like.  They can then make an offer to the Compaq
shareholders to trade VA stock for Compaq stock.  However, the Compaq
shareholders don't have to accept--and why should they accept?  And
the VA shareholders don't have to approve--they can dump the stock,
sending the share price down and probably killing the deal--and why
should they approve?  After all, if they want Compaq stock, they can
just buy it themselves.

The effect of the IPO is that VA got a big cash infusion--but not
enough to actually buy Compaq--and their cost of capital for further
acquisitions is low.  That is, they can leverage their stock price to
make an acquisition for less real expenditure than an ordinary
company.  But they most likely don't have the power to acquire a
public company whose shareholders would prefer not to be acquired.

VA buying Compaq isn't like the Red Hat acquisition of Cygnus, because
Cygnus was a privately held company.  Red Hat exploited their low cost
of capital--their cost of writing new stock was less than the gain to
Cygnus shareholders of getting liquid Red Hat stock.

   Disclaimer:  I am not an investment advisor.

Neither am I.  (I am now a VA stock holder, though, thanks to their
generosity to the community.)

Ian