Subject: Re: Great Bridge closes.
From: Tom Lord <lord@regexps.com>
Date: Fri, 7 Sep 2001 23:13:07 -0700 (PDT)



       There'd be a tension if it turned out that the smaller company held a
       big market for high-revenue after-market services that customers
       bypassed RH to obtain.  The smaller company would have to concede some
       of that revenue to RH if it wanted to keep its independence (and
       existence).  (Unless, of course, the revenues were *really* large.)

There's tension in the other direction too.  If RH turns a tiny cost
stream (paid to the smaller company) into a huge revenue stream, and
wants to spend some of that revenue growing the size of the
engineering effort currently owned by the smaller company, does RH
have to buy out or simply replace the smaller company (in order to
maximize RH's stock valuation)?

I don't think the answer is automatically yes.  It might be yes in
some cases.  RH shouldn't buy the smaller company (but should pay them
extra money to help them grow) if, for example, the smaller company
has other customers besides RH (who RH can't or doesn't want to
serve); or if the risks of subsuming the enlarged engineering effort
are sufficiently great (because RH doesn't want to own a costly
business unit with an uncertain lifespan); or if the cost of
acquisition or replacement would be too great.  And RH doesn't want to
own everything since that would create a single point of failure in
the open source industry, upon which RH's stock valuation depends
(with more companies, the "root" of the revenue stream can change over
time, giving waning roots opportunity to retrench and survive).
There's efficiency, too, in letting the smaller company set its own
corporate policies and build its own culture.

Sorry to Red Hat...this is sufficiently abstract that I should 
probably just be saying ``the bigger company.''

-t