Embedded Linux company secures emergency funds

Lineo has had to draw new funds from its backers to stay alive after a lack of cash led to it shedding more than 200 employees. It's partly a sign of the times, and partly down to mismanagement, experts say

Lineo, the privately held embedded Linux company whose operating system powers the Zaurus handheld from Sharp, has won new funding that will keep the company running while it struggles to achieve profitability.

The news comes a matter of days after the latest of several rounds of layoffs, which have reduced the company's headcount from more than 300 to less than 80. At the time of the most recent layoffs, on 20 March, chief executive Matt Harris said that revenues for the first quarter of this year were up sharply from the previous quarter, and the company expected to make a profit by the middle of this year.

A source close to the company confirmed that Lineo had secured additional funding from its backers, which include The Canopy Group and Egan Managed Capital, which would allow the company to continue paying its bills and its employees while it reorganises. Harris met with backers last week to arrange for the company to be recapitalised, but details have not yet been finalised, the source said.

"Lineo will be continued," the source said. "It will not close."

An unconfirmed report from Linux newsletter Linuxgram.com said that Canopy and possibly Egan had committed at least $1m (£700,000) to Lineo after employee paycheques bounced, including the final paycheques of terminated employees.

Lineo's problems are part of a larger tech industry slump which has seen investment capital evaporate from once-hot areas such as the Internet and Linux. Lineo was particularly vulnerable to the downturn because, by 2001, it had quickly acquired several companies all over the world in markets from clustering to interactive television. Since then, Lineo has been gradually divesting itself of most of these acquisitions.

"They became so diversified that they lost track of what they stood for as a company," said Bill Claybrook, research director for Linux and Unix at Aberdeen Group.

The company hit a peak in late 2000, but cancelled a planned flotation in January of 2001, at which time it had just over 300 employees. Lineo has gone through several rounds of layoffs and reorganisations since then.

The market Lineo is tackling -- selling operating systems and development tools for embedded devices -- is difficult to break into by nature, industry observers say. "Companies who are building devices utilising these products and services are looking for long-term partners having a track record of success," said analyst Dan Kusnetzky of IDC. "This means that getting started is very difficult in the best of times. Add an economic downturn to the equation and it appears to be pushing some companies to the edge."

However, the embedded operating systems market has a huge potential, observers say. Until recently most device makers have used in-house operating systems that offered only limited functionality, but they are increasingly moving to third-party software such as that offered by Linux vendors Lineo, Red Hat or MontaVista, or other operating system makers like Wind River Systems or Microsoft. Start-up MontaVista, in particular, has shown consistent success, analysts say.

"The market shows great promise," Claybrook said.

Lineo has reorganised to focus on three markets: handheld devices, edge devices like residential gateways and firewalls, and digital television.

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