ACADEMIA

Red Hat announced on 10 April that it is to acquire JBoss for US$350 cash and stock, in a 40%/60% respective combination, plus a US$70 maximum incentive earn-out on meeting future sales targets over a two year period. The definitive agreement is expected by end May 2006 due to regulatory processes. In Butler Group’s opinion, the acquisition will create the first open source super-company, offering a number of advantages for both Red Hat and JBoss. With regards to prospective enterprise customers for whom financial viability and business stability are important issues, Michael Azoff, Senior Research Analyst with Butler Group, Europe's leading independent IT Research and Advisory organisation Butler Group, says the combined Red Hat and JBoss entity offers them a stronger business proposition. Marc Fleury, CEO of JBoss, has described the move as a choice by JBoss – the company was looking to expand its global reach and accelerate its already outstanding growth rate of 150%. With press rumours circulating that Oracle was a potential buyer, Marc categorically stated that it was Red Hat’s position in the open source business community that was key to the decision, and was carried forward with the support of JBoss’s key employees amongst its 150 strong workforce. JBoss will continue as an autonomous business unit within Red Hat, headed by Marc Fleury, with administration supported by Red Hat’s more experienced offices. Most crucially, JBoss’s existing international offices, comprising four offices in EMEA, are now augmented by Red Hat’s 31 world-wide office network. Future branding is to be decided but the JBoss name is expected to be retained. The similar subscription-based business models that both companies use, and their open source basis, make for an excellent fit. Red Hat belongs to a first generation open source development model and has refined this with new product functionality delivered through the Fedora Linux distribution, following the ‘release early and often’ open source principle, whereas the Red Hat enterprise edition provides a solid, bullet-proof Linux distribution that corporate customers desire, with long release cycles. JBoss employs the lead developers in the open source projects at the base of its JBoss Enterprise Middleware System (JEMS) platform, and calls this approach a second-generation open source business model. Red Hat, a company that at its most recent financials disclosure had US$1.1 billion in cash and investment, has been growing steadily to dominate Linux distribution in the corporate world. JBoss, which is on track to positive cash flow by year end, has been growing faster than Red Hat. The combined entity provides a subscription model for first class infrastructure software that also happens to be open source – whether that is a coincidence or not makes for an interesting debate. The main element lacking in the portfolio is a database – can we see a MySQL and Red Hat tie up in future? That is possible, but bearing in mind Red Hat’s and JBoss’s emphasis on the enterprise, there are certainly other open source database candidates. The combined sales team will be able to exploit cross-selling opportunities and offer better security and confidence through the larger size that corporate customers desire. Red Hat stated at the press conference that its investment in the JOnAS J2EE Application Server will continue, but one suspects that a future roadmap will provide convergence towards the JBoss J2EE Application Server. JBoss offers solutions for multiple platforms: it can support .NET front-end development and the PHP language for the Linux Apache MySQL PHP (LAMP) stack, as well as Java based systems - this flexibility will be retained, as will partnerships with rival concerns, such as Novell – the business world is full of such apparently contradictory relationships, no less so amongst open source businesses. Both companies have made the open source element almost irrelevant for their customers, who willingly pay a subscription to receive certification that the software will work with other applications in the enterprise environment, and for the maintenance and upgrade support. In addition, both Red Hat and JBoss have a professional services arm that brings in about 20-30% of revenue. What is not irrelevant is that customers pay no upfront cost for the actual software, making Red Hat/JBoss software solutions cheaper than rival closed-source solutions – Butler Group expects this business to keep rising.