Red Hat’s IPO Battles Timing, Microsoft
Red Hat Inc., the leader in a fast-growing Linux software movement regarded as a threat to Microsoft Corp.’s dominant Windows operating system, today boldly charges into a public market that has beaten down other technology companies.
As Internet companies lower initial public offering prices, or even pull their IPOs, Red Hat boosted its offering price at the last minute to the $12-to-$14 range from $10 to $12.
“Linux is perceived as the first competitor to Microsoft dominance,” said Steven Tuen, director of research at IPO Value Monitor, a New York-based industry newsletter, explaining the strong investor response. “It has a loyal following among programmers.”
But Tuen and other analysts question whether Red Hat, which derives revenue from supporting and distributing software that is available free, can be worth the nearly $1 billion it would be valued at if the IPO goes as planned.
Although Red Hat, which is based in Research Triangle Park, N.C., has seen its sales double in each of the last three years, the company lost $2 million in the three months ended May 31 on sales of just $2.8 million.
What makes Red Hat attractive is its focus on the market for servers, which are computers that share files and handle other functions of computer networks. In this market, Linux has a 15% market share.
That’s less than Microsoft’s 38% share, but Linux usage is growing much faster than Microsoft’s because of a reputation for reliability, and it already exceeds Microsoft in the fast-growing market for hosting Web sites.
Framingham, Mass.-based IDC estimates that nearly half of all Linux programs sold were sold by Red Hat. Technology leaders such as Dell Computer Corp., Compaq Computer Corp. and IBM Corp. have invested in Red Hat and bundle the company’s software with their computer systems.
Linux is an operating system originally written by Finnish programmer Linus Torvald. With the help of a worldwide network of collaborators, and a commitment to keeping the software open and free, Linux has developed into a sophisticated program used for operating everything from Web sites to supercomputers.
It has gained strong support during the last year from major computer players such as IBM and Oracle, which are basing strategic new offerings on Linux.
Linux’s biggest strength--that anybody can copy it and improve upon it--is also its biggest weakness when it comes to trying to turn a profit.
Although Red Hat is leading an effort to develop an improved version of Linux for the desktop, the software still falls far short of Microsoft Windows. Linux now has only about a 2% share of the desktop market and, with key applications such as Microsoft Office still unavailable, it could be years before most people will try using Linux on their personal computers.
Still, a successful IPO for Red Hat, neatly timed to coincide with a large gathering of Linux fans at a conference in Silicon Valley, is likely to spark other Linux vendors to follow suit. Waiting in the wings, for example, is VA Linux Systems, the leading provider of computer hardware running Linux.
“It’s unclear how many of the Linux companies can survive,” said Dan Kusnetzsky, an analyst at IDC, “but Red Hat has the best chance of success.”
However, Red Hat is causing some tension in the Linux community. Volunteer programmers might begin to question why Red Hat founders Robert Young and Marc Ewing should walk away with more than $128 million each from the offering when the Linux programmers, who did most of the work, got nothing.
“There are real mixed feelings,” said Phil Hughes, publisher of the Linux Journal. “There are some pretty unhappy people who say Red Hat took something that belongs to the community and turned it into a profit for themselves.”
Red Hat did seek to appease the programmers by giving them a first shot at participating in the offering. But the move only served to further antagonize the community when most programmers who applied were turned down by the underwriters because they did not match strict legal requirements for making risky investments.
And there’s another danger to the Linux community waiting in the wings. If Linux companies go public at high valuations, they will be under pressure to perform. Analysts worry that this could destroy the cooperative mood that has been a feature of the Linux community and a key reason for its success.
