Red Hat Snaps Up Sistina

Red Hat Inc. (Nasdaq: RHAT), the leading North American provider of commercial Linux software, plans to buy storage software startup Sistina Software Inc. for $31 million in stock by the end of January 2004.

The move, Red Hat's first acquisition since October 2002, is significant on several fronts. It clarifies the status of storage networking software as a top priority in enterprise computing. It reflects a growing emphasis on Linux as part of ongoing moves to streamline data-center functions (see SAN Vendors Scope Linux). And it demonstrates ongoing consolidation in a market that's growing fast enough to force suppliers to partner with others or buy technologies they need rather than build them in-house.

Red Hat announced the deal during its quarterly earnings conference call last night -- a call that contained good news: Revenues of $33.1 million, a sequential increase of 15 percent; and net income of $4.1 million ($0.02 per share). With $329 million in cash and investments at hand, Red Hat's ready to put into action its plan to mine specific areas of the enterprise data-center software market.

CEO Matthew J. Szulik told Wall Street analysts on last night's call that Red Hat is determined to move away from selling Linux subscriptions for file and print, Web server, and mail management and delve deeper into the nuts and bolts of enterprise computing. Storage is one of the areas Red Hat's targeted, along with middleware, data-center virtualization, and system management.

Szulik summarized the market forces that put storage at the top of Red Hat's priority list. "For the past twelve months, Intel hardware providers have urged us to develop offerings for the storage marketplace," he says. "The emergence of iSCSI as an industry standard presents a unique opportunity for Red Hat to expand its capabilities and to build third-party relationships to respond to the $2 billion available market in storage."Much remains to be worked out. Red Hat plans to integrate Sistina into the company mainstream; it won't create a separate division to house its acquisition. But just what that means isn't yet clear, and it's too soon to talk specifics, according to Red Hat spokeswoman Leigh Day.

Among questions to be settled: how many of Sistina's employees, which now number approximately 45 between the startup's Minneapolis headquarters and offices in California and the U.K., will be taken aboard Red Hat, beyond the core engineering team. It also hasn't been determined whether Sistina CEO Ian Bonner and other members of the executive team will stay or jump ship.

It also remains to be seen exactly how the acquisition of Sistina will affect the ongoing set of complicated relationships in the Linux market. Red Hat's Day says the company plans to work to maintain Sistina's ISV (independent software vendor) relationships, including ones with Hewlett-Packard Co. (NYSE: HPQ) and SAP AG (NYSE/Frankfurt: SAP), which has invested in Sistina and also has a partnership with Red Hat (see SAP Takes Tiny Piece of Sistina). But it seems unlikely that SuSE Inc., a Red Hat competitor, will continue to promote integration of its wares through Red Hat.

Storage software provider BakBone Software Inc. (Toronto: BKB), which announced a partnership marketing relationship with Red Hat and other Linux players earlier this week, says the acquisition isn't a threat to other storage suppliers, and simply adds to the variety of solutions coalescing around Linux.

"Sistina is in the business of file systems and volume managers for Linux," says Jet Martin, director of product management at BakBone, who feels the move underscores the growing popularity of Linux in enterprise networks.Shares of Red Hat were trading at $16.51, up $2.23 (15.62%) this morning.

Mary Jander, Site Editor, Byte and Switch