Two Market Leaders are hoping to Create a One-Stop Linux Powerhouse

January 27th, 2000

NEW YORK--VA Linux Systems, which sells computers and support services, today announced it has acquired Andover.Net, a site dedicated to Linux information, in a cash and stock deal worth roughly $1.04 billion.

The news was announced in conjunction with the LinuxWorld Conference and Expo.

The merger positions Sunnyvale, Calif.-based VA to provide a multitude of services for Linux programmers, bringing together Andover.Net's vast Linux information and community sites with VA's open source services. VA hopes the deal will drive sales as developers visiting Andover.Net for information may well be steered to VA's products.

Todd Schull, VA's chief financial officer, said that based on yesterday's closing price of $136.875 each share of Andover.Net common stock would be exchanged for $3.81 in cash and 0.397 of a share of VA common stock.

"The actual amount of cash and VA Linux Systems common stock exchanged for each share of Andover.net common stock will vary based upon the actual number of shares of Andover.Net common stock outstanding at the closing date," said Schull, during a conference call with analysts this morning. The deal is expected to close during VA's third fiscal quarter.

He added that the deal would be based on the average closing price of VA stock over a 10-day trading period beginning four days prior to yesterday.

"Under these assumptions, Andover.net stock holders would hold approximately 13.5 percent of the combined company," said Schull.

Andover.Net shares leapt up $9.38, or 26 percent, to $45.38 in early morning trading. The stock has traded as high as $90 and as low as $25 during the past 52 weeks. Shares of VA dropped $8.38, or 6 percent, to $128.50. The stock has traded as high as $320 and as low as $105.50 during the past 52 weeks.

In the rapidly expanding Linux marketplace, portals like Andover.Net are becoming a must-visit destination for Linux programmers as well as people looking for alternatives to the Windows operating system. VA Linux itself already had a significant portal site, Linux.com.

The acquisition raises the possibility that the Linux.com site will lose the nonprofit status VA Linux has accorded it. VA representatives were not immediately available for comment.

The adoption of Linux, to the chagrin of software giant Microsoft, has been gathering momentum this past year as heavyweights, including Intel, IBM and Hewlett-Packard, begin to support the open source operating system. An open source operating system is one whose original programming instructions may be seen and modified by anyone.

Linux's technology is based on Unix and has inherited that operating system's strength in servers. However, many efforts are underway to make it work for consumers as well, a move that would expose Linux to a potentially much larger market.

Investors' embrace of Linux companies has led to high valuations for companies such as VA and Linux seller Red Hat, enabling the companies to use their stock to purchase other companies. Red Hat, the first Linux company to go public, last year acquired Cygnus Solutions, a programming tool company whose technology powers much of the development of Linux, for about $674 million, and Hell's Kitchen, a maker of e-commerce software, for about $86 million.

VA has been one of the heavy hitters of the Linux world, winning an investment from Intel to help bring Linux to Intel's forthcoming 64-bit chips alongside established companies IBM, Hewlett-Packard and SGI in the Trillian project.

Though it got its start as a hardware seller, VA has been moving in the direction of services such as helping customers choose what system to buy, fixing it when things go wrong, or writing new software to make things work. For example, HP last week selected VA to bring support for its inkjet printers to Linux and to the popular Samba print server software that runs on Linux.

Andover.Net receives most of its revenue from advertising on its Web sites, three of which are highly focused on Linux. In its most recent quarter, Andover.Net reported a loss of $15.7 million with revenues of $2.1 million. The loss included charges related to going public.

Andover.Net and VA went public in early December just one day apart, raising $72 million and $132 million, respectively.

Last summer, Andover.Net acquired Freshmeat.net, a site for announcing new Linux software, and Slashdot, a discussion site frequented by fans of the newly popular operating system.

"With our purchase of Andover.Net, we can offer the developer community better infrastructure for open source development and expand the range and effectiveness of solutions available to our customers," Larry Augustin, VA chief executive, said in a statement.

VA's acquisition of Andover.Net will mean consolidation of major Linux Web sites and positions VA's Internet efforts more closely to competitors Red Hat and Linuxcare, both of which have Linux information and technical support sites.

VA purchased the Linux.com site a year ago and has filled the site with information and tips. And Andover.Net itself has been active with the recent acquisition of QuestionExchange, the first stage in a plan by Andover.Net to make more money from Linux technical support services as well as Web advertising.

What's not clear is whether the mission of Linux.com will change in the future. VA has claimed the site to be a nonprofit entity, only helping VA indirectly by increasing goodwill toward the company. Andover.Net and Red Hat, by contrast, explicitly plan their sites to generate advertising revenue.

That nonprofit status might be changing. VA said it will "increase the opportunity for sponsorships and business partnership revenues across the company's network," including Linux.com.

Linux news sites aren't hard to find. Red Hat began its Wide Open News late last year and formally announced it this week. Linux Magazine publisher Infostrada Communications bought the Linux.net address this week. Internet.com expanded its roster of Linux sites with the acquisition of LinuxNewbie for an undisclosed amount. Internet.com in the past has acquired JustLinux, LinuxStart, LinuxCentral, LinuxPlanet and Linux Today. In addition, CNET, publisher of News.com, has started its own Linux site.

Slashdot, however, isn't really just a news site; it's popular not so much for the links to technology news around the Internet, but more for the lively discussion that typically results.

Today's deal is subject to approval by the stockholders of Andover.Net and other customary closing conditions.