Hot Linux investment news from the tropics

On a cold day up in the North Country this week, I read a news article
about a hot little Linux firm based in the tropics. If the article was
accurate, and if the managers of one international mega-bank haven’t
lost their minds, then this story should warm the heart of anyone who’s
invested their life savings in Linux company stocks.

Ah, winter in Vermont. The temperature outside has warmed up to minus 5
degrees, and the biggest news in the local paper concerns the growth of
the sport of “skijoring” in the state. Apparently this is some sort of
Swedish junk sport that involves abusing animals. Our local version
involves hitching up a small pony (instead of sled dogs) to go
galloping through the snowdrifts, pulling along a skier behind. If you
or the animal don’t get killed, it’s lots of fun, I’m told. They banned this “sport” in a couple of towns just over the state line
from
here. I guess there was an accident. It seems the snow drifts were
covering
a parked car.

While scanning the international papers looking for a tropical
escape
from such merriment, I came across a news story about Conectiva, the Brazilian Linux
firm.
It turned out to be an escape from the usual gloom-and-doom business
news about Linux companies. Reading it, I learned that at least one
major international bank thinks that the entire sector is undervalued,
and that it has been, even at the height of the dot-com
mania.

The reason that this particular news story caught my eye is
because it involved an investment of $100 million in Conectiva by ABN Amro, one of the
world’s biggest financial institutions, with over a half trillion
dollars in assets. Banks this size don’t get to be big by throwing
their money away.

But ABN Amro has made that investment in exchange for 10% of the
company, giving Conectiva a market value of a billion dollars.

For what?

For a firm that grossed 7.5 million Real — that’s $3.8
million, U.S. in 2000, according to Brazil’s Valor
Economico.

Dot-com valuations still live, south of the border.

I confess my ignorance about Conectiva compared to many of my OSDN
colleagues. I knew they were among the earliest commercial shops to
support USB connectivity, and I knew that that they had put together a
distro that didn’t completely screw up existing partitions, but the
firm
wasn’t all that high on my radar.

But the more I’ve learned, the more I’m struck by how extraordinarily
ordinary Conectiva is, compared to other Linux companies found around
the world. Located in the tech center of Curitiba, a city in the
southern Brazilian state of Parana, Conectiva says its mission is to
“create the infra-structure and … resources in order for Free
Software to be widely adopted in [the] Third World.” The company
develops distributes and supports Linux (Conectiva 6.0) applications in
Portuguese, Spanish and English. With offices across Latin America,
Conectiva’s products and services include books and manuals, training
kits, tech support and software. Think Red Hat meets O’Reilly, with an
emphasis on simplifying the installation and upgrade process,
especially the server market.

That’s pretty good. But it’s not extraordinary.

That’s not to suggest that there aren’t some important differences
between Conectiva and the average North American Linux shop. For one
thing, it’s not in North America … or Europe or Japan. As a first
major developer of a distribution “outside the USA-Europe-Japan axis,”
Conectiva can serve as a rallying point for Third World developers in a
market that’s more likely to welcome Open Source than almost anywhere
in the world.

It’s also growing even more explosively than most Linux firms based
above the equator. Conectiva hopes to triple its gross revenues this
year, attempting to generate a turnover of R$20mil (a little over $10
million U.S.) by the end of 2001. It plans to expand the number of its
locations in Brazil, and set up units in Venezuela and Chile.

And it has a management structure populated by grown-ups. The
Conectiva management team is pretty robust, compared to the average U.S.
Linux or dot-com start-up. Most of the management team came from Banco
do
Brasil, which had a solid reputation for technical innovation in the
Latin American banking sector. Conectiva’s highly educated CEO, Sandro
Nunes Henrique, was a former senior tech manager
there. The other senior managers seem to have similarly strong executive
backgrounds in finance and software development, averaging nearly 20
years of experience each.

All this is quite worthy, but it doesn’t begin to answer the
question, why on earth is Conectiva worth so much money?

The answer may be — because that’s what Linux firms are
really worth!

Although a number of analysts have re-trashed several Linux
stocks (including that of our parent company, VA Linux) for “failing to
meet expectations,” most of these firms are still showing annual growth rates of better than 50% a year. Name another business with that kind
of
growth curve. As IDC’s Dan Kusnetzky said, if you “ignore the stock
market and look at the shipments and acceptance of the software, it was
a good year” for Linux and most Linux companies. In fact it was a
spectacular one. And unlike the average dot com, or PC company, Linux
growth hasn’t stalled out. Far from it. Linux is on track to take over
much of the server market, and embedded Linux looks like a good bet to
do the same in the thin client and handhelds market.

More importantly, Linux and the major developers of the Linux
marketplace have won mindshare. As IBM’s Dick Sullivan put it,
“What we are seeing is a recognition [of Linux] by corporate America…
Companies are now putting Linux into their plans.”

That’s not to say that Linux developers are out of the woods. In
2001 Linux specialists could find themselves in a brutally competitive
market with firms like Sun and IBM, and perhaps a re-energized Microsoft.
Despite this, there’s every reason to think that the market is big
enough to keep most of the present competitors afloat. The main
obstacles are access to capital and the management perils associated
with explosive growth.

Does that mean the crazy market valuations of
last year were right? It’s hard to say, but apparently there’s at least
one bank that seems to think so.

NewsForge editors read and respond to comments posted on our discussion page.