John Paczkowski

Recent Posts by John Paczkowski

IBM to Buy Red Hat…Someday…Maybe

ibm_redhatRed Hat is destined to be acquired, most likely by IBM–according to Jefferies analyst Katherine Egbert, anyway. Noting that Oracle’s acquisition of Sun Microsystems is bad news for Red Hat, Egbert says the open-source outfit is going to need a partner sooner or later and that IBM may well volunteer for the position. After all, if Oracle found Sun’s Java software to be important enough to own, it’s conceivable that IBM would take a similar view of Red Hat. To acquire it would certainly be a savvy defensive move against Oracle. Her reasoning:

To date, much of Red Hat’s success has come because the software is relatively inexpensive, Unix applications port easily to Linux, and because Red Hat is not Microsoft i.e. they are not a large, integrated vendor that can lure customers in with low pricing but exploit their pricing power once the customer becomes dependent on the software. Most customers view Red Hat Enterprise Linux as a way to break free of large vendor lock in and the high economic toll it extracts.

However, with Oracle buying Sun, Red Hat now has two giant competitors, both of whom have virtually unlimited pricing power. We believe it will be increasingly difficult for Red Hat to compete over a sustained period as a small, standalone, independent vendor against the upcoming entry of Oracle, who could offer cheap hardware/software bundles, steep discounts to stay on or migrate to Open Solaris, or even pay customers to not use RHEL as they seek to stabilize the Solaris maintenance stream. Therefore, with Red Hat’s choice-based value proposition potentially pre-empted by a data center land grab among 2 giants, it seems to us that Red Hat needs a partner. A large partner. Someone with pricing power, C-level relationships, and a significant enough presence in the data center to combat the Oracle/Microsoft threat. IBM fits the bill.

So, caught between Oracle (ORCL) and Microsoft (MSFT), Red Hat (RHT) rushes into the waiting arms of IBM (IBM). Makes sense I Suppose, as Barron’s recently argued–though with a caveat: Unlike Sun (JAVA), which was fast slipping into the mud when Oracle acquired it, Red Hat is doing quite well for itself. And that could make it prohibitively expensive.

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