34 Comments

Summary:

Sure it would make for strange bedfellows, but Microsoft needs Red Hat Enterprise Linux and an acquisition would signify a bold move by new CEO Satya Nadella.

Over the past 40 years Microsoft has built its mega-billion-dollar business around the Windows operating system and Windows applications. But as the company seeks to preserve its enterprise power in the cloud era, where Windows is not as huge a deal, here’s a bold proposal: Microsoft should buy Red Hat.

It’s a counterintuitive move for a company whose former CEO likened Linux to cancer, but here’s why I think Microsoft might want to do it. First, Microsoft is an enterprise software company that hopes to transition its strength in that segment into the cloud-and-mobile era. And for Microsoft’s new CEO Satya Nadella, who will orchestrate that transition, an acquisition of Red Hat would be a bold stroke. Talk about thinking outside the box.


Source: IDC

Microsoft is pitching Windows Azure as the public cloud of choice for businesses. A major stumbling block there is the fact that Red Hat Enterprise Linux, the de facto standard Linux in businesses, does not run on Azure. Why not? No one’s really saying, but my take is that Red Hat is dragging its feet because RHEL competes with Windows Server. Red Hat has no such compunction about putting RHEL on AWS, which does run RHEL, because Amazon is not an OS competitor per se — at least as the market is defined now.

The lack of RHEL on Azure is a big issue for Microsoft. Given that Microsoft has bent over backwards to make Azure hospitable to third-party OSes and tool sets (Ubuntu Linux and SUSE Linux run on it), RHEL’s absence is particularly glaring because when you talk enterprise applications from Oracle and other vendors, SAP et al., RHEL is Linux (sorry Oracle Linux, you’re not there yet.)

Neither Red Hat nor Microsoft would comment on why RHEL won’t run on Azure but sources close to Microsoft said customers ask the company about Red Hat support all the time and it has to refer customers back to Red Hat. Their thinking is that nothing can pressure a company to action more than customer pressure, but still, no dice.

Red Hat is affordable

If you look solely at the numbers, Microsoft could do this deal easily. The market value of Red Hat stock is about $11.2 billion. Subracting its $1.3 billion in cash, Red Hat would cost $9.9 billion. A 20 percent premium would put the purchase price at more like $12 billion. As one of my Wall Street friends put it, since Microsoft has about $84 billion cash in the bank, it could do this acquisition with its eyes closed.

Antitrust hurdles are big but not insurmountable

Analysts, including Gigaom Research’s own MSV Janakiram, said no such transaction would pass regulatory muster. Taken together, Red Hat Enterprise Linux (RHEL) and Windows Server would comprise 87 percent of the server operating environment market, according to IDC analyst Al Gillen — who was also dubious about my premise.

That number would give regulators pause if they define the market as server operating systems running inside company data centers. But if they were to factor in what’s running in Google and Amazon Web Services and other clouds, the picture could be much different. And we all know that lawyers can redefine the affected market when it painting a prospective acquisition in a rosy, competitive light.

In that universe, Windows Server plus RHEL might not be dominant at all. According to figures from The Cloud Market, nearly 60 percent of all Amazon Machine Images (AMIs) run Ubuntu Linux, while 6.3 percent run Windows and 5.9 percent run Red Hat. And I’m pretty sure Google runs zero Red Hat Linux or Windows.


Source: The Cloud Market

And, if regulators can approve the US Airways and American Airline or Comcast and NBC Universal mergers, I think all bets are off. I’ve seen strange things happen in the software world, including Oracle’s acquisitions of Siebel Systems and PeopleSoft in blockbuster deals that consolidated much of the enterprise applications market.

Those transactions taught me to never say never. So go ahead, use the comments below to (politely, please) to let me know what you think.

Feature photo courtesy of Shutterstock user Jorge Salcedo

Note: this story was updated at 9:19 a.m. PST March 7 to reflect that most SAP applications do not run on RHEL.

  1. Ankit Upadhyay Friday, February 28, 2014

    Interesting proposition to say the least and definitely out of the box. I am sure the headlines will follow that Microsoft doesn’t care about consumers and buying and becoming fully the enterprise company.

    Share
  2. sounds like a good idea, microsoft could become like IBM of the late eighties, too grand in itself to believe in the need to spread it’s wings, which is good, in that in has encouraged a whole lot of other companies to get a foothold ithey would never have enjoyed had mircosoft dug in early in that sphere, i suppose after missing the boat on the internet, it thinks the way Tiger woods did before the big fall out, untouchable, giving customers access to service, no matter where it comes from, is smart business in a world that is only a finger tip away.

    Share
  3. Don’t they already have a stake in Suse due to their relationship with Attachmate? Also, the critical success factor of RHEL is their ability to attract top talent. If Microsoft were to acquire them, they would lose much of their top talent due both to culture shock and the reputation that Microsoft has in the software space. With the inability to keep top talent, Red Hat would implode. The only reason to acquire them would be to destroy competition and that would definitely not be allowed.

    If, instead, Microsoft focused on the existing distributions that already run on Azure like Suse and Ubuntu, they could increase their influence in the cloud computing arena. Then they should purchase Xamarin and make Visual Studio and Windows Desktop the best solution for developing mobile applications that connect to Azure.

    Share
  4. You are completely wrong. Red Hat does run on Azure. Google it (or Bing it, if you prefer). Just because it doesn’t have a pre-built image doesn’t mean it won’t run there. It’s bring-your-own-license. This is another one of your weird link-baiting “articles” subtly dissing Microsoft.

    Share
  5. I honestly don’t believe that 67% of servers are running Windows. How was this data collected? Because W3Techs did a study on the top 10 million (public) websites, retrieving OS-specific packet responses from each server and came up with: 67.4% Unix-based (38.6% Linux), and 32.6% Windows.

    But if you want to include all websites, IDC’s data (which is who you were citing) actually shows that in Q3 of 2013 only 50.3% of servers were running Windows, and 28% on Linux.

    Share
    1. the numbers i used came right from IDC. most recent full year totals of new **paid** licenses sold…. so that might account for discrepancy?

      Share
    2. Wouldn’t that data be restricted to just web servers?

      Share
  6. I like it

    Share
  7. You should take the “Cloud Market” numbers with a large spoonful of salt.

    They don’t measure _running_ images, but rather all images that exist. That includes nightly test builds of Ubuntu pushed into the system by Canonical, and another big chunk is Bitnami doing roughly the same thing. (Look at the “by owner” chart.)

    But this metric really isn’t useful at all. If a million people are running from a given image, it’s only counted once — while a million images run by no one at all are counted as a million.

    Share
    1. can you recommend a better source? Last time i used Cloud Market numbers aws folks were fine with them, although you are right they include dormant images.

      Share
      1. I wish I knew a better source, but I don’t think the really useful information is available to anyone outside of Amazon. I agree that that leaves us somewhat in the dark, but I don’t think that means that _bad_ numbers are more useful than no numbers. They’re still bad numbers and really can’t be taken to mean something they don’t.

        I certainly don’t doubt that Ubuntu is popular in EC2, but these numbers don’t really show the truth either way.

        Share
        1. Joe Fernandes Saturday, March 8, 2014

          Thank-you mattdm. I’ve seen so many tech writers misinterpret & misuse these same statistics, it’s frustrating. Counting available AMI’s is not the same as counting actual running instances!

          Share
  8. Who cares about RHEL and SUSE in the cloud. Ubuntu is the leader because developers like it. Proof of that is the fact that Ubuntu is the leader even where RHEL is officially available, AWS.

    Share
    1. really? can you name a Bank or financial institution that uses Ubuntu??

      Share
  9. Barb, you said “Given that Microsoft has bent over backwards to make Azure hospitable to third-party OSes and tool sets (Ubuntu Linux)”

    So, wouldn’t Canonical be a much better bet, instead of Red Hat? What’s you thinking here?

    Share
    1. My thinking is that Microsoft hears demands from enterprise customers for RHEL. For better or worse, as i said in the story, RHEL **is** linux to many enterprise accounts.

      Share
      1. But with the IT landscape moving towards cloud services (public, private and hybrid) doesn’t Microsoft need a forward-looking enterprise solution — one that includes an established OpenStack market presence?

        Share
        1. Syamsul Anuar Sunday, March 2, 2014

          As far as I know enterprise cloud also runs RHEL

          Share

Comments have been disabled for this post