Mandrakesoft Buys Rival Linux Distro, Conectiva

by Timothy Prickett Morgan

Franco-American commercial Linux distributor Mandrakesoft today acquired rival Conectiva, the Brazilian Linux distributor. The acquisition by Mandrakesoft comes just as both companies have cleaned up their books after years of losses caused by their attempts to commercialize Linux in their respective markets. This has not been an easy task for any company, including rivals Red Hat, Novell, Turbolinux, and others.

The fact that privately held Conectiva would consent to being acquired by Mandrakesoft after reaching break-even two quarters ago speaks volumes about what Conectiva thinks are its prospects for wringing future profits out of its Linux implementation as a stand-alone and significantly smaller distributor. The Brazilian economy has had its ups and downs in the past couple of years--as have other Western economies--and the economic benefits and open source nature of Linux have a strong appeal to Brazilian companies.

That is why Conectiva, which was founded in 1995 and which has 60 employees in the cities of Curitiba, Sao Paulo, and Manaus, has had success selling Linux to government agencies (including the Brazilian Army, Navy, and Air Force and a huge installation of 15,000 desktops and 800 servers in the Sao Paulo public school system) and companies trying to save money and buy local software instead of paying Microsoft. Conectiva has a pretty hefty Linux training business, too, and says that it now trains 15,000 people a year in conjunction with partners on how to use Linux in their organizations.

Conectiva is probably the most influential Linux distributor in Latin America, and distributes its software in Portuguese, Spanish, and English. Mandrankesoft is best known for its French distribution and is the dominant Linux supplier in France; it has distributions in other languages and aspirations in the North American Linux market, which is why Mandrakesoft has dual headquarters in Paris, France and in Altadena, California. The company says it has 4 million users on its Linux desktop and server editions.

Mandrakesoft was founded in 1998; it emerged from bankruptcy a little more than a year ago and now has 70 employees. The company is buying all of Conectiva's stock for 1.79 million euros ($2.3 million). This is roughly equal to the 1.7 million euro ($2.2 million) in sales that Conectiva booked in its last fiscal year. Mandrakesoft said in a statement that Conectiva was a profitable company and that it had been running at breakeven for the past two quarters, which seems to imply that the Conectiva was finding it harder to stay in the black ink. The amount that Mandrakesoft paid to acquire Conectiva is also roughly equal to the profit that Mandrakesoft brought to the bottom line in its last fiscal year. The company had sales of 5.18 million euros ($6.7 million) and net income of 1.39 million euros ($1.8 million).

The companies are both founding members of the Linux Core Consortium, an organization that was founded in November 2004 to create a single, shared implementation of the Linux Standards Base 2.0 specification. In addition to Mandrakesoft and Conectiva, the LCC includes Japan's Turbolinux, and America's Progeny. These four Linux distributors--now three--aim to implement the Linux Standards Base 2.0 specification jointly as a shared set of source and binaries that they will all distribute as the heart of their own Linux distributions.

In a conference call after the announcement of the acquisition, François Bancilhon, Mandrakesoft's CEO, says that the combined company will be headquartered in Paris and that all of Conectiva's employees are being retained as part of the merger. The combined company will have over 70 software engineers (30 from Conectiva, 40 from Mandrakesoft). Before the end of the year, says Bancilhon, Mandrakesoft will launch a single Linux product line, which has yet to be named, that will be based on work done by the two companies have been doing as part of the LCC. Bancilhon said that the combined companies would generate about 2 million euros a quarter in sales, and that he expects substantial growth in the coming year. Almost all of Conectiva's sales are in Brazil (it has reseller partners in Colombia and Peru), while Mandrakesoft is getting 40 percent of sales from Europe, 40 percent from North America, and 20 percent from the rest of the world. Research and development, services, and sales will all remain distributed across Mandrakesoft's and Conectiva's current facilities.

As for the prospect that Mandrakesoft might acquire other members of the LCC or another Linux distributor in other key markets, Bancilhon did not rule it out. "In general, we think this market is ready for some consolidation," he said on the call. "This is one good example. It is our job to talk to other players, and we are doing that." He noted that the uptake of Linux in China was of particular interest to Mandrakesoft.