Red Hat’s opportunity (Jason Maynard of Credit Suisse)

I must have been channeling Jason Maynard when I wrote this yesterday about Red Hat’s opportunity with RHN and RHX. Jason Maynard of Credit Suisse (yes, the same Maynard that called for Messman’s head at Novell and had it handed to him on a platter) wrote an analysis (“Red Hat: Opportunity and Challenge Abounds”) that suggests that Red Hat could be doing more with its resources, including its brand.

Net net: Red Hat is the industry’s dominant open source brand and has a lot of brand resources to bring the open source ecosystem in-house.

We like the idea of Red Hat expanding their footprint to leverage some of the interesting technology developments of emerging open source ISVs. RHX is the company’s new partner program and online store to sell customers a complete set of certified, 3rd party open source solutions. As interest in open source technologies grows, Red Hat is perfectly suited to be a broad solution provider. Given the strength of the Red Hat brand we are surprised that management hasn’t been more aggressive about working with their open source counterparts to deliver a complete open source alternative to proprietary technologies like Microsoft….

We think investing in RHX is critical because they should be expanding their product footprint into a broader spectrum of product areas like systems management, collaboration, content management, database management, and SOA infrastructure….

Another angle on RHX is that Red Hat could simply be using this to test customer interest and market demand for various products and then acquire the most popular companies. This could be a strategy to eliminate some of the potential product and sales risk since they would be in a position to see where customers find the most value. Red Hat has over $600 million in net cash on the balance sheet, a healthy currency at 7x EV/Revs, and stable cash flow, making financing multiple transactions a fairly easy proposition.

Maynard then goes on to point out a few acquisitions that would make sense, including Zimbra and one or two others.

What Jason doesn’t acknowledge is the feeling within Red Hat – justified or not, I don’t know, but I tend to respect management’s judgment in this sort of thing – that it’s a small company with a big hat. In other words, the company’s reputation exceeds its ability to actually consume multiple acquisitions. It took the company a year to truly digest JBoss (which is not bad considering how long it took us to assimilate SUSE when I was at Novell – acquisitions are painful).

But this may not be the time to be as prudent as Red Hat would like. Oracle is not sitting still. Neither is Microsoft. Both have put together compelling end-to-end value stories that customers are buying into. RHX is a good start to Red Hat offering a “full meal deal” on open source, but the next step has to be to keep tightly integrating successful open source products into its portfolio, built on top JBoss and RHEL.

Still, it’s important to appreciate the other side of Red Hat’s dilemma: the company can’t afford a dilutive, non-accretive acquisition. As Larry Augustin recently observed, there simply aren’t that many open source companies making the kind of bank that Red Hat needs to keep customers and investors happy. Several will be making $20M+ by next year…perhaps that’s the time that it makes sense for Red Hat to start buying?

I’m not sure. Maynard and the Red Hat team are far smarter than I on this sort of thing. The important thing is for Red Hat to operate like it has to go it alone, and the same holds true for the companies in the open source constellation. This isn’t Web 2.0. In open source, no one can afford to persist with silly, money-losing business models in the hope that hype will attract a sugar daddy like Google. There is no sugar daddy in open source.