Open source acquisitions - It's all about the stack

Why JBoss is worth over $350 million to Red Hat - the stack

Industry analysis by Beth Schultz, plus the latest news headlines.

About a month ago, Linux vendor Red Hat announced that it reached an agreement to acquire JBoss, the provider of the open source application server of the same name. The deal was reported at $350 million, with up to $70 million upside if JBoss meets certain financial performance targets. With annual revenue estimated to be $40 million to $50 million, the sale price represents between seven and nine times the earnings. On a financial basis, this is a significant valuation.

What makes it worth that much? It’s all about the stack - the vertical mix of components needed to deliver IT services, starting at the hardware, extending up through the operating system, database, applications, application server, Web server, and the tools to manage them all.

Microsoft, a key competitor to Red Hat, owns a partial stack in the operating system (Windows), Web/application server (IIS), database (SQL Server), and management tools (System Center). For Red Hat, extending its stack with an application server is a good way to expand its revenue base, and compete more strongly with Microsoft (and with competitor and partner IBM, which has a complete stack from hardware to applications).

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About a month ago, Linux vendor Red Hat announced that it reached an agreement to acquire JBoss, the provider of the open source application server of the same name. The deal was reported at $350 million, with up to $70 million upside if JBoss meets certain financial performance targets. With annual revenue estimated to be $40 million to $50 million, the sale price represents between seven and nine times the earnings. On a financial basis, this is a significant valuation.

What makes it worth that much? It’s all about the stack - the vertical mix of components needed to deliver IT services, starting at the hardware, extending up through the operating system, database, applications, application server, Web server, and the tools to manage them all.

Microsoft, a key competitor to Red Hat, owns a partial stack in the operating system (Windows), Web/application server (IIS), database (SQL Server), and management tools (System Center). For Red Hat, extending its stack with an application server is a good way to expand its revenue base, and compete more strongly with Microsoft (and with competitor and partner IBM, which has a complete stack from hardware to applications).

It also undermines rival Linux vendor Novell, which had partnered closely with JBoss to provide its own partial stack, including SuSE Linux and the ZENworks management solution. Novell must surely be considering its response. One good option would be to extend its stack by partnering with, or even acquiring, JBoss rival Jonas (whose erstwhile partnership with Red Hat must now be at risk, despite Red Hat’s denials). Another is to up the ante by acquiring open source database provider, MySQL. Both would certainly fit Novell’s open source/open standard commitments, although they may jeopardize its strong relationship with IBM.

Another vendor looking to extend its stack with open source components is Oracle. Oracle has been steadily building its stack with an enterprise management (EM) platform that includes not just database management, but also performance, diagnostics, availability, configuration, and security management. Oracle also recently acquired InnoDB (the open source storage engine underpinning MySQL) and Sleepycat (another popular open source database). It is therefore little surprise that CEO Larry Ellison also recently mused about (but decided against) buying a Linux distribution, MySQL, and JBoss.

Many other vendors would benefit from extending their stack. HP, for example, could compete much more effectively with IBM, in both the large server and the blade market, if it had its own database and application server, to add to its hardware, operating system (HP-UX), and management infrastructure (Control Tower, OpenView, etc.). SAP may well be looking to fight back at Oracle’s moves by extending its own stack with an open source database and application server. BEA’s WebLogic could compete better with IBM’s WebSphere if BEA had a deeper stack, including an open source database, and possibly even a Linux distribution. Consequently, open source components such as MySQL and Jonas are likely to be hot property over the next 12 months.

Schultz is a longtime IT journalist. You can email her or find her here.