Red Hat agrees to buy open-source upstart

The fast-growing open-source software industry took a big step towards the mainstream on Monday as Red Hat, the biggest distributor of the Linux computer operating system, agreed to buy upstart JBoss for up to $420m.

The acquisition creates the first open-source company able to offer a broad array of the so-called “infrastructure” software on which corporate IT systems are based. As such, it could pose a long-term challenge to companies like Oracle, IBM and Microsoft, all of which sell traditional commercial alternatives, said Rick Sherlund, software analyst at Goldman Sachs.

The new threat from open-source companies, which are founded on a low-cost approach to developing and distributing software, has drawn some of the technology industry’s biggest names into a flurry of acquisitions in recent months.

Oracle itself tried to buy JBoss earlier this year as part of an attempt to build an open-source “stack”, or package, of software that would act as a low-priced alternative to its existing products. IBM last year bought Gluecode, a rival to JBoss.

Open-source companies allow others to view and rewrite their software and usually distribute their code free over the internet, greatly reducing their development and distribution costs. Most charge fees for packaging open-source programs into reliable commercial-grade products, and for support.

While still small, open-source has become one of the fastest-growing corners of the software industry. JBoss had revenues of $16.2m over the last 12 months and is expected to have sales of $48m this year, said Charlie Peters, Red Hat’s chief financial officer.

Until now, companies like IBM and Oracle have used Linux, the best-established open-source product, as a way to fight back against Microsoft’s Windows operating system. That has made them important allies of Red Hat.

However, other companies that have sprung up in Red Hat’s wake have become more direct rivals. They include JBoss and MySQL. The former makes application server software and other “middleware” that lets companies run their applications over the internet, directly rivalling IBM and Microsoft. MySQL’s database is an alternative to products sold by Oracle, IBM and Microsoft.

Matthew Szulik, Red Hat chief executive, on Monday played down the suggestion that Red Hat was seeking to build a full stack of software to compete with the established software giants. He hinted, however, that the company would also now look to expand into database software, the biggest area of infrastructure software where it is not yet represented.

“We’re going to sit down…and think about that,” he said. “Already, customers are asking what to do with their unstructured data.”

News of the cash-and-stock acquisition, for an initial $350m with a further $70m based on future performance, pushed Red Hat’s shares up by nearly 9 per cent in early New York trading, valuing it at $5.3bn.