November 15, 1999 12:40 PM PST

Red Hat buys software firm, shuffles CEO

LAS VEGAS--Red Hat, the leading Linux seller, will acquire software company Cygnus Solutions for $674 million and, in a surprising move, has replaced its own chief executive officer, the company said today.

Red Hat got its start selling boxed packages of Linux, an open-source cousin of the Unix operating system. But it's been using the $84 million it raised in its August initial public offering to expand into consulting and technical support services and spruce up its Web site.

Cygnus has been offering major chipmakers such as Intel its expertise in developing crucial software called compilers, which translate programs written by users into instructions a particular computer can understand. The company also wrote a large part of the compiler that Linux uses by default and has been pushing aggressively to sell programming tools for Linux developers.

In addition, chief operating officer Matthew Szulik will replace Bob Young as Red Hat's CEO, the company said. Young will continue as chairman of Red Hat's board.

Today's acquisition gives Red Hat an entree into "embedded" devices, machines whose inner workings such as operating systems and hardware usually are hidden from the person using it, Young said here in a keynote address. Until now, Red Hat has been focused chiefly on the server market.

Now Red Hat will be able to take advantage of Cygnus' strong relationships with embedded systems programmers, with the companies such as Sony and Fujitsu that build embedded devices and with chip manufacturers such as Intel that build chips for those devices, Young said.

Young said Cygnus has about 180 employees and Red Hat has 235. "We want to keep as many of those people as we can find productive and useful and challenging [jobs] for," Young said.

Young doesn't plan to leave any time soon either, he said. He's 45 now and will likely stick around until retirement age, he said. The shuffle was done so Young could focus on spreading the open-source gospel while Szulik focused on the operational aspects of making Red Hat grow.

More acquisitions are likely, Young said. "We intend to scale this business as quickly as we can to take advantage of the opportunities in front of us," he said. One acquisition target could be Linuxcare, which provides Linux services that compete directly with Red Hat's operation. Young and Linuxcare cofounder Dave Sifry have declined to comment on reports that Red Hat approached Linuxcare shortly after Red Hat's IPO.

In a way, though, the acquisition positions Red Hat similar to Sun Microsystems, which has chosen not to compete with Microsoft in the desktop computer market. Sun instead aimed its efforts at servers and gadgets, two technologies that are growing in prominence with the rise of the Internet.

But where Sun believes that its Java software is the key to making software that works on lots of different devices, Young touts an effort from Cygnus called Elix. As previously reported, Elix provides a uniform interface to Linux-based gadgets so that programs will run on lots of different equipment.

Red Hat services on tap
The Cygnus acquisition will bolster Red Hat's effort to get more money out of services such as helping companies install, customize and support their computers, Young said. "This is going to enable us to develop tools and support services" to help the software developers, he said.

Just as Red Hat wants to make money providing services for those using Linux, Cygnus has been trying to do the same with Ecos, its open-source operating system designed for "embedded" devices. Although it's available for free, Cygnus has said it believes other companies will be willing to pay for the expertise of Cygnus in tailoring Ecos for the task at hand.

Young said it's not clear what exactly will happen to Ecos. "I suspect it's going to be a very important part of the future of our embedded products," he said. Ecos is very good in extremely small devices with very little memory and processing power--an area where Linux is somewhat oversized--but those devices are getting ever more powerful.

However, Red Hat clearly believes Linux can get into pretty small devices. Finnish cell phone manufacturer Nokia also is working on a next-generation phone that will use Linux, and Young thinks Linux is up to the task.

Linux up against Microsoft
The acquisition also puts Red Hat into stronger competition with Microsoft, Young said. "They intend to have a solution for virtually every computing application on the planet," Young said. "I'm not sure there's anything we could do in this space where we would not bump into Microsoft."

Corel, on the other hand, has a Linux strategy aimed straight at the heart of Microsoft's business. "Corel is trying to do the most single difficult piece. They're going after Microsoft where Microsoft is the strongest. I wish them well," Young said. Corel announced today that its new version of Linux is done.

Young, ever the open-source advocate, didn't miss an opportunity to ding Microsoft. Among the benefits of open-source software is that a company can fix or improve software on its own. "Remember that feature you wanted that Microsoft promised, but it never showed up? Well, [with open-source software] you can build it."

Red Hat will issue up to 6,624,344 shares to buy all the stock of Cygnus, a privately held company. Cygnus had been considering going public itself, and had even embarked on a name change to back up that strategy and find a stock ticker symbol.

The acquisition strategy, along with Red Hat's surging stock price, gives it a growing similarity to Internet companies that are short on revenue and long on stock price. Such companies can use their valuable stock to acquire other companies.

Cygnus has been an open-source company, meaning that like Red Hat it released the underlying programming instructions to the public. Cygnus also has joined companies such as Hewlett-Packard in helping to sidestep Sun's Java licensing requirements, in writing its open-source operating system called Ecos designed for "embedded" devices such as pagers and factory robots and has helped companies such as Oracle and Corel port their software to Linux.

 

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