Time to Short Open Source?

How appropriate is it that, on Halloween, I read this:

"That's one of the risks of investing in this space today, it's almost become a bandwagon for people to jump onto because there's a lot of investor interest in the open source space." [Emphasis mine.]

Those were the words of Pradeep Tagare, manager of open-source investments for Intel's (Nasdaq: INTC  ) venture capital arm, during a recent interview with LinuxInsider. The context for his comments is his and others' conclusion that private equity interest in open-source software firms has risen by 200% to 300% over the last year.

The private equity deals included $18.5 million for database provider MySQL in February, $11.5 million for server administrator Centeris in March, and $13.2 million for voice over Internet protocol software maker Digium in August.

Even the once-dominant Ingres database, dethroned from its perch by Oracle (Nasdaq: ORCL  ) years ago, is at it again thanks to a venture buyout of the unit away from ailing software giant CA (NYSE: CA  ) .

Against that backdrop is a private equity market that seems to have way too much money to put to work. Surely, some bad deals must be ahead, right? Absolutely. So what's an investor to do? Short Linux providers such as Red Hat (Nasdaq: RHAT  ) and Novell (Nasdaq: NOVL  ) ?

Not at all. Instead, I think Oracle CEO Larry Ellison has it right. He's not offering a Linux distribution, but he'd love to support yours if that's what you'll use to run software. That's a smart move; Gartner reports that more than 80% of new Linux database license sales can be attributed to Oracle.

Does that leave Red Hat out in the cold, as some investors seem to believe? Not according to Ingres Chief Technology Officer Dave Dargo, who recently wrote in his blog that only 5% of Red Hat installations use Oracle.

Frankly, that claim seems odd given Gartner's data. But the point remains: There's still room to swim in the open-source pool if you know where to dive. For investors, that means avoiding hot new IPOs that slap an open-source sticker across a prospectus. Instead, stick with Oracle, Red Hat, IBM (NYSE: IBM  ) , and other firms that have proven their ability to deliver what customers want. Anything less is simply too scary to contemplate.

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Fool contributor Tim Beyers owns shares of Oracle. Get an inside peek at all the stocks he owns by checking Tim's Fool profile. Intel is aMotley Fool Inside Valueselection. The Motley Fool's disclosure policy is a rebel with a cause.


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