Linux Grows Up

In the minds of many industry analysts, Linux has been growing up in the glare of the spotlight over the past couple of years. If that observation is true, then the recent LinuxMall.com merger agreement with the publicly traded EBIZ Enterprises, Inc. (OTC BB: EBIZ) could set a trend for rites of passage as the open-source platform reaches maturity.

Despite support for Linux generally from the biggest of the big in the high-tech industry, the deal also highlights the struggle by companies to figure out a free software-based business model that works.

To IPO or Not To IPO

The merger is being called an attempt by LinuxMall.com to beat what amounts to an IPO curse in the volatile Nasdaq market.

The high profile IPO withdrawal of Linuxcare and the severe cost-cutting measures by IPO hopeful TurboLinux have emphasized the fact that the honeymoon between Wall Street and Linux is over.

As LinuxMall.com CEO David Shaw rethought his company’s planned initial public offering, Jeffrey Rassas and EBIZ were looking to move their OTC stock to Nasdaq. A mutual business interest at Chase Hambrecht & Quist introduced the two, and a successful courtship immediately followed.

After realizing that the two companies had fewer conflicting areas of interest than previously thought, they decided to proceed with marriage plans, moving to create a vendor neutral online shop for everything Linux.

IPO Alternative

The deal, with a stock value of approximately $35 million (US$), represents what Netcraft analyst Don More calls an IPO alternative.

The venture will aim to build long-term value by avoiding the IPO road, said Jeffrey Rassas, president of the newly merged company, in an E-Commerce Times interview.

Instead of focusing on first day stock gains that have in many cases eventually returned to pre-IPO prices, Rassas is looking to “start out low and prove long-term value by short term business objectives and execution thereof, creating growth, revenue and shareholder equity.”

Added Rassas, “There’s a tremendous amount of synergy in the combining of the companies.”

The newly merged company, which will retain the LinuxMall.com name, is counting on the power of that synergy to help the combined stock once it is transferred to Nasdaq under the proposed “LINX” symbol.

LinuxMall.com has built a solid brand name, but the merger brings the necessary resources to the table for the company to move ahead of its competition, according to Dan Kusnetzky, Linux expert and vice president of system software research for International Data Corp. (IDC).

An Amazon for the Linux World

“There clearly needs to be, and I hate to use this, an Amazon of the Linux space,” observed Rassas. “A number one e-commerce destination site where people can come and actually get a full offering of Linux-related products.”

The two companies, which had previously viewed each other as aggressive competitors, are now counting on their respective areas of concentration to be complementary. The focus of EBIZ’s Linux Store is business-to-business (B2B), while LinuxMall.com works primarily in the business-to-consumer (B2C) area.

Combined, the new LinuxMall.com is looking to be an improved vehicle for manufacturers and developers to move their products and solutions into expansive markets.

Profits?

In an atmosphere where VA Linux Systems is seen by some analysts as successful when it reports smaller than expected losses, the merger deal has grabbed some attention by stating that it will be the first profitable Linux company. According to Shaw, the “redundancy in costs” will be a notable contributor toward this goal.

Significantly, the new company will be tapping into LinuxMall.com momentum created in part by the March merger with Linux distribution firm Frank Kasper & Associates, Inc., and key investments by such companies as SCO (Nasdaq: SCOC), a UNIX firm in which Microsoft (Nasdaq: MSFT) reportedly has a stake.

The new company is looking to build upon the economic strength of LinuxMall.com and an undervalued EBIZ stock to help build the resources to successfully execute its business plan and create profits.

Although the stock market has seemed hostile to companies like Red Hat (Nasdaq: RHAT), whose stock price recently returned nearly to pre-IPO levels, adoption numbers remain firmly on the side of Linux. According to IDC, Linux moved into the number two spot in world OS sales in 1999, catching up to Microsoft’s Windows NT.

Tempering the Exuberance

While Kusnetzky foresees an expansion of the Linux market, he warns against misplaced optimism. “IDC is seeing many different business models being tested and it’s not at all clear which of them will survive for the long term and which will fall by the wayside.”

Although the current move “is important to the players involved,” cautioned Kusnetzky, it “is not likely to have a large impact on the market as a whole.”

More added something of a counterpoint to the exuberant announcement, stating that the retail arena is not where “the main action” currently is in the Linux market.

Forging Ahead

Regardless of analyst skepticism, LinuxMall.com remains optimistic, and is currently working on an aggressive increase in strategic alliances made possible by the merger deal.

Shaw stated that LinuxMall.com will be soon announcing partnership-related deals with “major industry players who, because they’re seeing a dominant leader emerge, are willing to jump even further into the Linux marketplace and use LinuxMall.com as a delivery vehicle.”

The new company will also focus on creating resources for the Linux community, following, for instance, the lead of VA Linux with its SourceForge online developer site. “There’ll certainly be a lot of co-opetition between the companies because we certainly want what’s best for the community,” said Rassas.