Turbolinux, Linuxcare call off acquisition deal

Software vendor Turbolinux Inc. and technical services firm Linuxcare Inc. have called off a planned merger, less than three months after the deal was signed by the two companies.

Arthur Tyde III, the CEO at San Francisco-based Linuxcare, yesterday confirmed that the proposed acquisition of his company by Turbolinux is being dropped because of the softening economy and "various financial aspects . . . that couldn't be agreed upon" in the wake of the merger announcement.

The two companies disclosed the acquisition agreement in February, saying that the combination would allow them to offer a bundle of Linux software and services to users. The deal was seen by analysts as a sign of things to come in the Linux business, which is currently populated by numerous small vendors.

But the economy and IT spending took a turn for the worse after the agreement was signed, and Tyde said Turbolinux and Linuxcare decided "the market conditions that brought us together in the first place had changed." The deal was effectively cancelled last Thursday after officials on both sides agreed that parting ways amicably was the best idea, he added.

"There are deals [with users] that we're still going to work on together," Tyde said of the two companies. "It's not a hostile situation." Tyde was scheduled to become chief technology officer at the combined company, which would have retained the Turbolinux name and been headed by current Turbolinux CEO T. Paul Thomas.

Thomas echoed the view that changed economic conditions helped to quash the planned merger. "It just didn't make any sense financially to put the companies together," he said. "There's nothing sexy about it. There's no conspiracy. We mutually agreed to go ahead and each run our own companies and continue to work together."

Linuxcare and Brisbane, Calif.-based Turbolinux did sign a definitive agreement to proceed in February, and the two companies had begun working together on some activities, such as having their sales forces make joint customer visits. But final merger documents hadn't yet been filed with the government, Tyde said.

"It's kind of like an annulment agreement to a marriage," he said, referring to the demise of the merger. "You can't really say it's a divorce, because we weren't really married." The terms of the deal hadn't been disclosed, but Tyde said there will be no penalties or payments to each other as a result of its cancellation.

The acquisition of Linuxcare by Turbolinux was seen as a way for the two companies to round out their offerings by bringing together Linux-related software and services under one roof. Despite the deal's collapse, Tyde said, Linuxcare is set to continue in the Linux services business and has enough cash in the bank to last for "at least two years."

Dan Kusnetzky, an analyst at market research firm IDC in Framingham, Mass., said the end of the deal was a big surprise. "It looked like they were well on their way to becoming one big company, and that company looked well-positioned to take on the big guys" in the Linux business, such as Research Triangle Park, N.C.-based Red Hat Inc., Kusnetzky said. The Turbolinux/Linuxcare combination appeared to be capable of creating "a pretty formidable competitor," he added.

This story, "Turbolinux, Linuxcare call off acquisition deal" was originally published by Computerworld.

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