OK, I've spent some time investigating this one, so I decided to post my
progress here.  Unfortunately I don't have a full fix yet, but I managed
to find some interesting pointers related to systemd.

First of all, I confirmed what Christian and Andreas were seeing: the
problem happens on every second "systemctl start dnsmasq.service"; squid
takes 30 seconds to restart regardless of dnsmasq/resolvconf (this is
still true nowadays, with groovy); nss-lookup.target fails to start on
xenial, but does start on bionic; the issue doesn't seem to happen on
bionic.

As for the systemd bits I mentioned, I found these issues:

- https://bugs.launchpad.net/ubuntu/+source/systemd/+bug/1417010
- https://bugs.debian.org/cgi-bin/bugreport.cgi?bug=777113

The good news is that they are really similar to what we're experiencing
here, even though our problem doesn't seem to be cirular dependencies on
systemd service files.  The bad news is that the fix proposed by Martin
Pitt (the last one, that ended up landing) is already available on
xenial.

One of the suggested fixes was to add a "--no-block" on /usr/sbin
/invoke-rc.d's "systemctl reload" command.  I did that, and it obviously
"solves" the issue, although I'm not confident that it's the proper fix
for this.

Something that caught my attention is the fact that the process that is
hung is actually the "systemctl reload squid", and not squid itself.  I
verified that "/etc/init.d/squid reload" actually exits successfully,
but for some reason "systemctl reload squid" keeps waiting.  With what I
know so far, I feel inclined to say that this is a systemd issue, and
not a dnsmasq/squid/resolvconf one (of course, we can talk about squid's
30-second restart, but that's orthogonal).

I'll let you know when I have more data (or hopefully a fix).
Meanwhile, I'd appreciate comments/feedback, if you have any.

** Bug watch added: Debian Bug tracker #777113
   https://bugs.debian.org/cgi-bin/bugreport.cgi?bug=777113

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https://bugs.launchpad.net/bugs/1761096

Title:
  dnsmasq starts with error on Ubuntu Xenial amd64 when squid installed

Status in dnsmasq package in Ubuntu:
  Fix Released
Status in squid package in Ubuntu:
  Fix Released
Status in dnsmasq source package in Xenial:
  Confirmed
Status in squid source package in Xenial:
  Confirmed

Bug description:
  Setup to reproduce:

  Ubuntu Xenial amd64 net install iso from
  http://archive.ubuntu.com/ubuntu/dists/xenial/main/installer-
  amd64/current/images/netboot/mini.iso

  Install system with mostly defaults + LVM + OpenSSH server

  Note that this bug applies to both DHCP and static IP+DNS network
  configurations

  Once server rebooted and is available, log in and install dnsmasq + squid:
  apt-get update && apt-get install squid dnsmasq

  output of this can be found at https://pastebin.com/9Atuipju
  journalctl -xe output at https://pastebin.com/uLhfM4jN

  Furthermore at this point I can run alternating errors

  root@ubuntu-min:~# date ; service dnsmasq start ; date
  Wed Apr  4 09:18:07 CEST 2018
  Wed Apr  4 09:18:07 CEST 2018
  root@ubuntu-min:~# date ; service dnsmasq stop ; date
  Wed Apr  4 09:18:39 CEST 2018
  Wed Apr  4 09:18:39 CEST 2018
  root@ubuntu-min:~# date ; service dnsmasq start ; date
  Wed Apr  4 09:19:10 CEST 2018
  Job for dnsmasq.service failed because a timeout was exceeded. See "systemctl 
status dnsmasq.service" and "journalctl -xe" for details.
  Wed Apr  4 09:20:40 CEST 2018
  root@ubuntu-min:~# date ; service dnsmasq start ; date
  Wed Apr  4 09:42:57 CEST 2018
  Wed Apr  4 09:42:57 CEST 2018
  root@ubuntu-min:~# date ; service dnsmasq stop ; date
  Wed Apr  4 09:43:14 CEST 2018
  Wed Apr  4 09:43:14 CEST 2018
  root@ubuntu-min:~# date ; service dnsmasq start ; date
  Wed Apr  4 09:43:26 CEST 2018
  Job for dnsmasq.service failed because a timeout was exceeded. See "systemctl 
status dnsmasq.service" and "journalctl -xe" for details.
  Wed Apr  4 09:44:56 CEST 2018

  and so on... Each and every 1 out of 2 stop/start cycle fails in 1m30s
  timeout

  Complete journalctl -xe output attached

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