How Open Source Might Come Back to Haunt Magazine M&A
Software patent lawsuits cost up to $5 million. Know what you're buying.
Open source—a program whose source code is made available for use or modification as users or other developers see fit—is enabling publishers to ramp up their online businesses quickly and cheaply. And a publisher with a healthy Web business can be valued between 10-to-15X EBITDA, compared to six-to-10X EBITDA for a print-only publisher.
However, some M&A experts say an open source-based business could come back to haunt the buyer of that business-especially if they buy something without realizing its key products are based on open source software.
"Open source is a big issue," says Charlie Engros, managing partner at legal firm Morgan Lewis. "When you buy a commercial enterprise today, there’s an excellent chance it includes open source software. You could also be buying a lawsuit because someone could force to make that software freely available to the world."
In August, the U.S. Court of Appeals for the Federal Court made a ruling that allows greater protection for open source software against copyright infringement. The case involved a company called Kam Industries, which downloaded open source code to use in a product that programs chips in model trains. The code was originally released under an artistic license, which requires users to give credit to the author, identify the original file source and describe how the code has been changed. The code’s author claimed Kam violated the copyright and filed an injunction to prevent Kam from using the software, an injunction that was initially denied by the U.S. District Court for the Northern District of California, before being upheld by the U.S Court of Appeals.
New applications are emerging that can detect open source installations, such as OpenLogic Discovery, which identifies installed open source software through graphical interface and command-line interface. With the American IP Law Association estimating defense against a software patent lawsuit costing between $2 million and $5 million, that’s a strong incentive for potential buyers to make open source part of the due diligence process and make sure all terms and licenses with open source software have been fulfilled.