Linux to get hot again......keep an eye on LNUX>.....SAN FRANCISCO (Reuters) - As more Linux-related companies file for initial public
offerings amid Linux madness on Wall Street, investors are wondering which, if any, of the
upcoming offerings has the most potential for financial success.
In the month of January, Caldera Systems Inc., which develops Linux-based software and
educational programs, and Linuxcare Inc., a developer of Linux-based services, both filed
registration statements to go public.
And sometime in February, LinuxOne Inc., a little-known and controversial Linux
distributor, is expected to go public, after filing its registration statement in September.
Last year, IPOs of companies related to Linux -- a free version of the Unix operating system
developed by Finnish programmer Linus Torvalds -- were red-hot amid sentiment that it
represents a possible threat to Microsoft Corp.'s (NasdaqNM:MSFT - news) Windows
operating system. While Linux has mostly made its biggest inroads as a stable operating
system for running e-mail and Web servers, some companies and two open source projects
are working on making it easier to use on the desktop, and thus increasing the number of
users.
Linux is also gradually starting to appear in new Internet appliances and mobile devices. Last
week, when the top-secret Transmeta Corp. of Santa Clara, Calif., launched its new Crusoe
chip family for notebook computers and mobile devices, it also announced a new version of
Linux, called Mobile Linux, developed by Torvalds, its most famous employee.
So as Linux continues to gain momentum in the marketplace, investors are hoping for repeat
performances of IPOs like VA Linux Systems Inc. (NasdaqNM:LNUX - news) -- which
soared to a record first-day gain of nearly 700 percent last month.
''Fairy dust has been sprinkled on Linux, and there is economic value here,'' said Andy
Rappaport, a managing director at venture capitalist August Capital in Menlo Park, Calif.,
and an investor in TurboLinux, a Linux distributor with a big presence in Asia.
''The market is looking at Linux and saying it will be measured in terms of fractions to
Microsoft,'' he said. ''Some chunk of Microsoft could be cleaved off and fall into our laps.''
Red Hat Inc., (NasdaqNM:RHAT - news), the largest distributor of Linux, was the first
Linux company to go public when it raised $84 million in its IPO last August, which included
investment banking stalwart Goldman Sachs as the lead underwriter. VA Linux Systems's
IPO was led by venerable Credit Suisse First Boston.
After Wall Street's initial euphoria over these and a few other Linux-related stocks and new
offerings, most of the stocks are off from their record highs of late last year, but are still
maintaining very high market valuations.
Red Hat, based in Research Triangle Park, N.C., is currently trading around 112 with a
market capitalization of about $7.7 billion, off from its high of 151-5/16 -- but still above
52-1/16, the closing price on the day of its IPO in August. In its first quarter as a public
company, Red Hat reported a fiscal third quarter net loss of $3.6 million, or 5 cents a share,
with $5.4 million in revenues.
Sunnyvale, Calif.-based VA Linux, by contrast, at 144-5/8 is trading well below its closing
IPO price of 239-1/4, but still has a market capitalization of about $5.7 billion.
Andover.net Inc. (NasdaqNM:ANDN - news), a network of Web sites targeted to the
open source programming community, is now trading around 31-5/8, down from its year
high of 90, and a current valuation of $474 million. Its slashdot.org site is called ''News for
Nerds.''
''From my standpoint, they are wonderful,'' joked Fernard Sarrat, the chief executive of
Linuxcare, when asked last month about the frothy valuations of some of the Linux
companies. ''What's happening is the Linux segment is being viewed by many as a potential
balancing force, an equal force, to Microsoft.''
Linuxcare is viewed by analysts and industry executives as having one of the better business
models to make money from Linux, but it also faces increasing competition. Linuxcare,
based in San Francisco, provides services and support for Linux, and reported revenues of
$304,591 for nine months ended September 1999.
But because Linux is not owned by any one company, analysts said that services could
eventually be a winner, as more corporations deploy Linux and need support. Improvements
to the operating system are made by a far-flung group of programmers, led by Torvalds,
some of whom are working in their spare time.
''The major amount of growth in Linux is going to be in services,'' said George Weiss, an
analyst with the Gartner Group. ''I have a problem with Red Hat's focus on many areas, it is
looking at software development tools, distribution, it wants a multifaceted approach. ... The
risk is they dilute their effort on trying to concentrate on too many things at once. Linuxcare
is very well focused. ... They know who they want to be in life.''
''The Linux companies that have come public so far have been backed by very serious Wall
Street money,'' said Frederick Berenstein, co-chairman of the Linux Fund in New York,
which is investing in Linux-related startups.
This includes some of the upcoming IPOs as well. Linuxcare's underwriters include CS First
Boston, Chase H&Q and Robertson Stephens. Caldera Systems of Orem, Utah, is being
managed by Robertson Stephens, Bear Stearns, and others.
However, one upcoming IPO has raised many questions in the Linux community, with the
filing from LinuxOne of Mountain View, Calif., which initially filed without an underwriter.
The company's founder, Wun Chiou, is unknown to most people in the Linux community
and its underwriters, Capital West Securities Inc., based in Oklahoma City, are also little
known. The company develops a version of Linux that has been receiving comments that are
less than flattering on sites like slash.dot (http://www.slashdot.org).
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