Novice Investing - Red Warning Sign on Red Hat

Date: Monday 01st 2008f December 2008 04:18:08 PM

Red Warning Sign on Red Hat - 10/26/2006

By: Novice Investing Staff

Oracle Inc. (ORCL) does it again. After successfully spending $ 20 Billion on buying up competitors (namely PeopleSoft and Siebels Systems Inc.), Oracle announced that it will offer a steep discount on bug fixes that crop up on Red Hat's Linux based products. Why is this a threat? Red Hat had amassed $ 278 Million in revenue last year by distributing a Linux open software and make money on giving out solutions to Linux users. With Oracle's $ 12 Billion annual revenue, it is easy for the company to undercut Red Hat's price. This move by Oracle would also undermine other open source software distributors such as Novell Inc. (NOVL), which is already struggling without this threat.

Oracle's move achieve two different things. First, it will provide Oracle with an additional revenue stream for the company with a proven business model. (Red Hat is profitable during last fiscal year). Second, Red Hat's market share and profit would have decreased by this price cut by Oracle. As a result, Red Hat's share price can be bought out cheaper should Oracle decide to acquire Red Hat.

For its part, Red Hat had announced on its website responding to Oracle's threat. First of all, the company interpret Oracle entry as a sign of endorsement to the Linux open source software movement. Basically, Red Hat denies that it will collaborate with Oracle in providing open source software to customers. As a result, Red Hat is not responsible to the changes that Oracle does to its programming code. What is more, Red Hat reassure investors that while Oracle will work on the same source code as Red Hat, the companies will build and test the programs differently. Thus, Red Hat keeps working on integration issue as the competitive advantage it can offer to Linux customers.

Meanwhile other Linux vendors will fret on what Oracle will do next. After all, they hardly make any money on the software, opting to charge on after-sales services. Red Hat Inc. (RHAT) stock meanwhile, was down 16% in before hour trading Thursday, a sign that investors consider Oracle's move as a real threat. We think that this threat is legitimate as well. For now, it is best to avoid Red Hat Inc. (RHAT) as well as Novell (NOVL), which has executed even worst than Red Hat in the past. This does not mean that Oracle will succeed. After all, execution is key. We can watch over the next few quarters to notice any changes in Red Hat's business model.

Is there any chance that Oracle will acquire Red Hat? Perhaps. But probably Oracle will find a way to acquire Red Hat at a lower price than today. Oracle's announcement proof that it has no interest in acquiring Red Hat yet.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Red Hat Inc. (RHAT) or any other securities.

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