Red Hat Makes $107M Virtualization Bet

Raleigh, N.C.-based Red Hat said Thursday that it paid US$107 million in cash for privately held Qumranet, which sells software that helps computer systems run multiple programs more efficiently on less equipment.

The acquisition continues Red Hat's David vs. Goliath narrative of chipping away at Microsoft's global dominance gained through its proprietary Windows operating system. Red Hat represents the computing community's counterculture and is the world's largest seller of Linux , an open source computer operating system that allows users to modify the code.

Climbing Through Windows

Qumranet's software will enable Red Hat to piggyback its products onto Microsoft Windows applications. That gives Red Hat access to Microsoft's customer base, said Katrinka McCallum, Red Hat's vice president of management services.

However, analysts at the Stifel Nicolaus firm in Baltimore warned Thursday that Red Hat paid a premium for the Israeli company and has met with limited success in the past in breaking into the emerging software area that Qumranet has been developing.

The acquisition will cut Red Hat's earnings by 5 cents to 6 cents a share in 2009 before the company realizes any financial benefits.

Red Hat's stock fell 51 cents, or 2.5 percent, Thursday to $19.93.

Fertile Ground

The multitasking software programs Red Hat acquired are referred to as "virtualization," an emerging technology field that represented less than $100 million in sales last year but could balloon to $2.4 billion in 2011, according to a recent Goldman Sachs analysis.

Microsoft entered the virtualization field only this year. The market is controlled by VMWare of California, but the field is so young that an estimated 95 percent of potential customers remain untapped.

At the least, Red Hat will be able to offer upgrades to its own customers. The majority of Red Hat's customers get their virtualization software from VMWare, according to analysts at the Raymond James firm in New York.

Efficiencies of Scale

The Qumranet software applications would allow a bank, for example, to update its entire regional computer network from a central server instead of having to send technicians to work on hundreds of computer terminals at numerous branches and locations, said analyst Brent Williams of the Benchmark Co. in New York.

Red Hat is one of the Triangle's most successful technology companies. It employs 2,500 worldwide, including about 550 at its Raleigh headquarters.

Red Hat's customers include the New York Stock Exchange, Amazon.com, Time Warner, Merrill Lynch, Lehman Brothers and DreamWorks.