Two big reasons Dell should buy Red Hat
Dell's biggest problem is that its one-time differentiation--low-cost hardware assembly and distribution--is now common industry practice. Indeed, it now routinely gets beaten at its own game, as called out in a recent article by Ashlee Vance in The New York Times.
Dell's growth, to revenue of $56 billion in 2006 from $5.3 billion in 1996, has come from within. But company executives now concede that they need to make a large acquisition, or a series of them, to tap the repeating, higher-margin revenue streams that come from the software and services businesses....
"It's not a question of size (of acquisition)," said Brian T. Gladden, chief financial officer at Dell. "I think the question is more around diversifying our revenue base and becoming bigger in some things that are attractive for the long term...(Servers, storage systems, software, or services) is where we have to do an acquisition to become relevant. There is no question."
Assuming that this is correct, and that Dell needs to look beyond hardware for growth, it could hardly do better than to buy Red Hat, or possibly Sun or Novell, for two reasons. The first is that buying Red Hat might be the least painful option for Dell getting into software in earnest, as it would offer Dell a close analog to what it has done to hardware: a commoditized software business that depends heavily on low-cost assembly and distribution. Dell and Red Hat were made for each other, in many ways.
The second reason is that buying Red Hat would also position Dell to do what no other software company has done, but which offers tremendous financial promise: consolidate the open-source ecosystem to provide huge value to chief information officers. I argued earlier that Red Hat should do this and become the ASCAP of the software industry, allowing CIOs to subscribe to its ever broadening portfolio of open-source solutions. Dell could expedite this, bringing cash and heft to the relationship.
Of course, Dell doesn't have much of a history of acquisitions, and might struggle to incorporate Red Hat, or any other software vendor for that matter. Red Hat, for its part, has a checkered history with acquisitions, though it is now making its JBoss acquisition pay healthy dividends.
Red Hat is brilliant at consolidating and delivering open-source software. Dell is brilliant at consolidating and delivering commodity hardware. Dell needs software to grow, and Red Hat could use some financial cushion as it seeks to expand its business beyond application servers and operating systems. Imagine if Dell/Red Hat could start offering open-source customer relationship management, enterprise resource planning, IT management, and more.
If you were a sales guy calling on CIOs, wouldn't you want to be selling the Dell/Red Hat suite of hardware, software, and services? The two companies routinely top CIO Insight's annual CIO surveys--combining them would give CIOs an amazing alternative to Microsoft and other solutions.
Update: The VAR Guy smacks me around a bit for thinking Dell would imbibe Red Hat. His thinking is strong, but I still think it depends far too much on Red Hat boxing itself into a corner as "the Linux company." If Red Hat gets ambitious with open source, all bets are off.
Matt Asay brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. Matt is vice president of business development at Alfresco, a company that develops open-source software for content management. He is a member of the CNET Blog Network and is not an employee of CNET. Disclosure. You can follow Matt on Twitter @mjasay. 
redhat=2.7B
sun=3.3B
novell=1.3B
Does anyone honestly think that Dell would spend, at least, and this economy, 2.7 Billion Dollars for RedHat?
Just wondering.
Thank You.
I think Red Hat's value is strategic and long-term, not a short-term buy for its revenue.
and in this economy, with their balance sheet, no loans are coming.
Sounds interesting - but didn't Apple try that one?
Red Hats client base is dwindle ever since they started marketing their operating system, and divided their product into Commercial / Hobbyist groups. Suse has suffered a similar fate since Novell bought them and the same rift occurred.
Personally I prefer Ubuntu when recommending it to new linux users because it has everything that Dell would have to change about Red Hat already implemented.
I am also curious if you can substantiate your claims that Red Hat market share is shrinking when the company continues to post growth every quarter. That would seem to be two hard statements to reconcile.
Dell is a $60,000M+ dollar (revenue) company with $3,500M+ in profits
Red Hat is a $520M dollar (revenue) company with $70M in profits.
We're talking orders of magnitude difference here. Dell spends more on the UPS shipping costs of it's products than the entire size of Red Hat's business. Red Hat is totally inconsequential to Dell's scale and would do nothing to change it's financial business dynamics.
Not to mention, with Red Hat's insanely overvalued Market Cap of $2B+, what is the business case to buy a Linux distribution support company when it is a FREE operating system. If this is the path they wanted to go down, they could simply start supporting a distribution of their own for millions (not billions) of dollars or at the very least, pickup one of the secondary players for considerably less money....not that I think that would be a good idea anyway.
Think bigger. I would be going after Cisco with competitive routers, switches and VoIP telephony equipment and systems. Do what they originally did to IBM and Compaq to Cisco. Target a feature set and price point that hovers somewhere around or between Linksys brand and native Cisco brands. Those are large businesses with relatively good margins compared to Dell's main business and if even reasonably successful at it could potentially double their bottom line within several years.
Dell would have to outperform and outprice someone like Foundry, something that even Cisco can not do.
You are looking just at money, not the real value and leveraging that buying RH might bring.
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Dell is NOT a hardware company. They are an OEM. They buy hardware that others make and slap it together. Intel, AMD, NVidia, Cisco, etc, etc are hardware companies.
Buying Red Hat makes no since while giving SUSE away and aquiring a reoccuring revenew stream that Novell poses is a better aquisition for Dell. Dell doesn't need an OS to give away it needs an engineering platform like eDirectory with products it can control much like IBM.
To Aquire Novell is like asking to buy the Louvre, it's easy to put a price on the building but try putting a price on the art inside. Love or hate Novell you can't argue with it's ability to engineer and If Dell can pull off a Novell aquistion it will have plenty of art to hang on it's walls.
Surely MSFT would be unimpressed and Dell can't risk having poor relations with MSFT via a RHAT frontal assualt? I do think the Dell guys know what you're thinking though - the acquisition of ASAP software by Dell was supposed to fix some internal compliance issues BUT also position Dell to manage the commodity elements of software purchasing and management into a one stop for CIO's
- by gerrygadget January 15, 2009 4:45 PM PST
- Red Hat and Canonical need to merge -- one for the server, the other for the client. Some might say that's impossible, but probably not. If they were both under the Dell umbrella, it makes a lot more sense. If Google's Android makes inroads on netbooks, laptops, and "nettops", Canonical's niche shrinks, and it can't afford to wither even a little or it's all downhill.
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(19 Comments)There's a few other open source companies that would be worth bringing under the same umbrella if Dell or somebody else (Sun?) decides to build out a reasonable stack of software for small/mid-size companies as well as enterprise. If Dell bought Sun they'd need to close down or sell off parts of it in order to stay solvent long enough to swallow and digest.
Dell needs to do something to diversify, no matter what happens. There's too much pressure from Acer, Asus, and others in the consumer market, as well as HP (even though it's hardware business customer service has won the "suckiest" award from PC World two years running). Dell could use software as one way to do that, assuming they feel they can avoid all the problems Sun has had as a combo hardware/software vendor. IBM sold off most of their business to focus on services and software. They only reason IBM is still in hardware is because they have a strong R&D background and are still generating patents. Dell isn't into R&D.