Update: Red Hat to buy JBoss for at least $350M

Oracle had its eye on the open-source Java software vendor

Red Hat Inc.'s planned purchase of JBoss Inc. will enable the Linux distribution company to more fully embrace service-oriented architecture (SOA) as well as expand its offerings of integrated software stacks, according to company executives. For its part, open-source middleware vendor JBoss will gain access to Red Hat's worldwide channels to extend its global reach.\

But one analyst warned that the tie-up may not prove as tidy as the combined companies hope, due to JBoss’ popularity with users of non-Red Hat platforms, especially Microsoft Corp.’s Windows Server.

Executives from Raleigh, N.C.-based Red Hat and Atlanta-based JBoss spoke during a conference call today about the surprise $350 million-plus acquisition, which, subject to regulatory approval, is due to close toward the end of May. In February, database and applications vendor Oracle Corp. was rumored to be in active discussions to purchase JBoss. The acquisition by Red Hat was announced this morning.

Although they didn't address the Oracle rumors, both the Red Hat and JBoss executives stressed corporate synergies and claimed that users and partners are keen to see a large, independent open-source firm.

"We chose the Red Hat option. I believe the companies sit well together," Marc Fleury, JBoss founder, chairman and CEO, said during the call. Fleury described Red Hat as the "big brother" to JBoss, in that the middleware vendor modeled its subscription and services business on the older Linux player.

JBoss, founded in 2001, will be an independent division of Red Hat, according to Fleury. He will report to Matthew Szulik, Red Hat chairman and CEO. “It was very important to me to know that I was taking this company into an environment that was conflict-free where there could be trust,” Fleury said.

The buyout offer, which is composed of 40% cash and 60% in Red Hat stock, could be sweetened by $70 million to a total of $420 million if JBoss meets certain financial targets.

Steve Walli, a vice president of strategy at Boston open-source consulting firm, Optaros Inc., said that while the purchase superficially “looks like a match made in heaven,” many internal issues need to be resolved.

“These are two very different companies,” Walli said. “Red Hat has been around for 11 years, a public company for 7 of them. They’ve got that quarter-on-quarter discipline. JBoss is, for all intents and purposes, still a startup.”

Walli also pointed out that JBoss has many customers that don’t run Red Hat or even Linux, which could complicate channel strategy. That reality was cemented last September when Microsoft Corp. and JBoss announced a partnership. Microsoft has its own application server, Internet Information Server, that is tightly integrated into its .Net platform. But during today's announcement, JBoss said that half of its customers run its Java Enterprise Middleware System (JEMS) with Windows Server.

“If the JBoss customers are not predominantly Red Hat customers, then it becomes interesting going forward,” Walli said. “But unless Red Hat obscenely raises prices or forces customers to buy the products together, I don’t think this will make a huge difference to current customers.”

Rachel Chalmers, an analyst with The 451 Group Inc., applauded the purchase, saying it makes Red Hat "much more than just a Linux company" and gives JBoss' investors a "respectable exit." The $350 million sale price, according to Chalmers, valued JBoss at seven times its estimated $50 million in sales last year.

Acquiring JBoss will speed up Red Hat's response to customer demand for SOA, according to Szulik. He pointed to the microkernel in the JBoss Java application server that makes it easier for customers to swap in and out the functions they require, an important capability for SOA deployments.

Having JBoss middleware as part of Red Hat will also make it easier for the company to delve deeper into delivering "component-based application architectures," Szulik said.

Red Hat first announced in December its plans to fully certify and support three open-source applications stacks -- a Web application stack, a Java Web application stack and an enterprise Java stack. The enterprise Java stack comes with support for a full Java application server based on the ObjectWeb Consortium's Java Open Application Project, known as Jonas.

Although JBoss has its own rival product to Jonas, "we've made a significant investment in Jonas, and we expect that to continue," Szulik said.

JBoss has a strong base in Europe and in the U.S., but not elsewhere.

"JBoss had been looking, and, quite frankly, struggling with geographic expansion," Fleury said, particularly in relation to the Asia-Pacific market. Having access to Red Hat's indirect and direct sales channels should "greatly help" in increasing worldwide adoption of JBoss middleware, he said.

Looking ahead, JBoss will continue to move further away from its origins as a Java shop, Fleury said, providing customers with a choice of middleware based on Java, the open-source PHP scripting language and Microsoft Corp.'s .Net.

Although brand issues are still being discussed internally, Red Hat is likely to continue the JBoss brand, according to Szulik.

Computerworld's Eric Lai contributed to this report.

Copyright © 2006 IDG Communications, Inc.

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