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(s msft) should buy Red Hat(s rhat).
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.
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(s orcl) and other vendors,
SAP(s 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(s rhat) Enterprise Linux (RHEL) and Windows Server(s msft) 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(s goog) and Amazon(s amzn) 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.