Red Hat Scoops Up JBoss in $350 Million Deal

Consolidation came to the Linux space Monday, with Red Hat saying it would acquire open source middleware maker JBoss in a stock-and-cash deal worth US$350 million.

Raleigh, N.C.-based Red Hat said the deal would speed the development of more open source solutions for enterprises and accelerate a shift to service-oriented architectures (SOA).

“It is at Red Hat’s very core to help unlock the power of open source and open communities to innovate across industries, geographies and economies,” said Red Hat CEO Matthew Szulik. “Red Hat and JBoss are fully aligned around the belief that the open source development model continues to change the economics of enterprise IT in favor of the customer, and we truly believe in the potential of software innovation, once freed from the fetters of proprietary development.”

The $350 million price tag on the deal includes a 60-40 stock-cash split and the opportunity for privately held JBoss’ shareholders to reap another $70 million if performance targets are met.

Red Hat said it was buying JBoss’ strength in creating Web-enabled middleware solutions, or Application Integration and Middleware and Portal (AIM) products, at a lower cost than proprietary offerings from the likes of IBM and others. The companies say the middleware market will be worth more than $6.4 billion this year.

Riding High

The acquisition comes at a time when many see Red Hat soaring to new heights in 2006 and beyond, based on the strength of its most recent earnings report, feedback during the recent LinuxWorld trade show and overall trends in enterprise computing.

Red Hat recently said that it sold to a record 10,000 customers during its latest quarter, helping subscription revenue climb 44 percent year-over-year to about $67 million.

Red Hat shares soared nearly 9 percent in morning trading Monday to $29.86, approaching the stock’s 52-week high of about $31.

The purchase is seen by many as extending a trend that has already lifted Linux and Red Hat — deeper adoption of open source solutions into more areas of the enterprise.

Red Hat is seen outpacing Novell and other Linux vendors by convincing customers to put open source products in place at the core of the network, going well beyond the edge-of-network solutions that some toe-dipping enterprises favored when Linux and open source were still the new kids on the block.

“We are throwing our collective hats in the ring — no pun intended — to be the super company for independent open source development,” Marc Fleury, the CEO of venture-backed JBoss, said in a conference call. He said the companies are a “fit” in terms of “business model, channels, service delivery, and culture.”

In fact, both follow the same subscription model for their products, servers and support, all delivered electronically, said Fleury.

Follow the Leader

The move could prompt some response from Novell, which has grown through acquisition itself in the past, or others in the space, including IBM and other commercial middleware vendors, analysts say.

For now, though, it seen solidifying Red Hat’s market presence, which is already enjoying strong organic growth.

Red Hat is positioning itself to take advantage of the growing crop of Linux applications, especially business productivity and related software that will help drive Linux demand within enterprises, Merrill Lynch analyst Kash Rangan said.

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