April 11, 2006
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Red Hat, the leading Linux distributor for Web servers, said on Monday that it has signed an agreement to buy open-source company JBoss for at least $350 million, a move that expands Red Hat's product line and adds to its growth potential.
By Martin LaMonica
"The planned acquisition reinforces the seriousness of our commitment to Web developers and customers to provide an integrated development platform of tools and services based on the collaborative power of open source," Szulik said in a conference call Monday with financial analysts.
The two companies employ a similar business model, where they charge customers a subscription fee for products and ongoing support, rather than an up-front license fee.
With the acquisition, Red Hat gains a popular open-source Java application server (used for running custom Web and business applications written in Java) and a more substantial offering for Java developers. JBoss is assembling a suite of open-source Java middleware, including a Web portal, messaging and a transaction server.
JBoss, which has about 150 employees, will operate as an independent division within Red Hat, with JBoss founder and CEO Marc Fleury reporting to Szulik.
Red Hat sells support for a competing open-source application server, called Jonas, from the France-based consortium ObjectWeb. Red Hat and JBoss had tried to come to terms on a partnership around the JBoss application server but were unable to, JBoss executives have said.
Red Hat's move ends months of speculation over a possible acquirer for JBoss, which has seen rapid growth in the past two years and had become a likely takeover candidate.
Two weeks ago, Fleury said that given the Atlanta-based company's strong finances, the next step for it "will probably be equity for an IPO or the right M&A."
Amid the growing number of open-source start-ups and their investors, the $350 million acquisition number is a validation of the open-source business model and an attractive payout. JBoss was largely self-funded and took in $10 million in venture investment in 2004.
In this calendar year, JBoss was on track to have revenue of $60 million and for 2007, to have $80 million, said Charlie Peters, Red Hat's chief financial officer.
Industry sources said JBoss' revenue in 2005 was about $20 million to $30 million. Peters added that JBoss will receive the $70 million incentive if it earns "slightly higher" revenue than targeted.
Fleury said he chose to sell the company to Red Hat because of the two companies' commitments to open-source development and his desire to create a large "pure play" open-source company.
"Our business models are very aligned. In many ways, Matthew (Szulik) was always the big brother. We copied what Matt and his gang did," Fleury said.
He declined to specifically discuss other suitors for his company, such as Oracle. However, he said joining Red Hat avoids an "impedance mismatch" of an open-source unit operating within a larger company that sells closed-source software with a traditional software license.
Szulik acknowledged that adding Java middleware to Red Hat's product line will place it in competition with Oracle and IBM, which sell similar products and are also large Linux partners.
"You will see those relationships move forward and, hopefully, (they) will evolve. Sometimes, we will be partners, sometimes we will compete," he said.
Szulik said the current Red Hat Java application server product, which is based on the Jonas software, will continue to be sold. However, he said JBoss' product line is "substantial and compelling, and we'll recognize it for what it is."
Burton Group analyst Anne Thomas Manes noted that Red Hat is paying a significant premium over JBoss' current revenue. Citing people familiar with the talks, she said Oracle's top offer to buy JBoss was $320 million.
"I'm a little concerned about how long this turns out to be positive for Red Hat's books," she said.
JBoss software is popular, particularly with Java developers, but existing Java server software companies garner far more revenue. BEA Systems' revenue last fiscal year, for example, topped $1 billion.
"Yes, JBoss is definitely making significant inroads, and there are surveys that show they are the most widely deployed application server, but how many of those (users) are buying subscription service? It's a small percentage," Thomas Manes said.
She added that the combination is good for people who choose open-source Java software because Oracle could have shut down JBoss or tried to steer customers toward its existing product line.
Entrenched middleware providers IBM, Oracle and BEA Systems have each sought to address the growing maturity and popularity of open-source software in the past two years.
IBM acquired a very small open-source Java application server company, called Gluecode, for less than $50 million. Oracle and BEA are making their Java server software work well with open-source Java tools.
In the database realm, Oracle sought, but failed, to acquire open-source company MySQL, a successful open-source company that earned just less than $40 million in 2005.
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