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December 19, 2004

Linux: the next big mega-merger deal?

Even though the dust hasn't yet settled on the latest round of mega-mergers in the software market, industry analysts are already speculating on the next big deal in the sector. According to some, Linux vendors Red Hat and Novell could be in the shop window next - with Sun Microsystems being touted as a possible buyer.

By CBR Staff Writer

There is speculation that a major Linux vendor may be the next big IT takeover target.

In a recent investor report, Merrill Lynch analyst Steve Milunovich said that Red Hat would be an attractive target for Sun to help the hardware manufacturer square up more evenly with rivals like IBM and Hewlett-Packard – both of whom have been quick to back the Linux movement.

Linux has certainly gained considerable momentum this year as a cheaper alternative to Microsoft’s Windows operating system. Because it is open-source software the code for Linux is open and can be manipulated by anyone – which lowers its cost. Linux distributors make money from the open-source code by providing technical support.

According to Mr Milunovich’s report it is high time for Sun to embrace and not just tolerate Linux. He added that buying Red Hat or Novell – the latter took its first steps into the Linux market following its 2003 acquisitions of Ximian (a provider of Linux desktop and management technology) and Germany’s SUSE Linux – might be the first step towards recovering some lost ground.

However both Red Hat and Novell drive a significant chunk of their revenue through server hardware vendors like IBM, HP and Dell. A merger with Sun would dramatically alter that sales model.

Sun is certainly strong enough financially to make a swoop. It has around $6 billion in cash while Red Hat’s worth is estimated at around $3 billion.

Predictably, Red Hat officials dismissed any takeover speculation at this stage. We have no plans for any purchase or sale, a Red Hat spokeswoman told reporters last week. Nevertheless talk of a buyout sent both Red Hat and Sun’s stock up last week.

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