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Is JBoss Acquisition Hurting Linux Vendor Red Hat's Stock?

Red Hat Stock Falling as Lawsuit Against JBoss Comes to the Fore

Red Hat's acquisition of JBoss is now worth about $35 million less than it was when first announced on April 10.

JBoss CEO Marc Fleury (pictured at left with new Sun CEO Jonathan Schwartz) wore his "red hat" and was all smiles at the recent JavaOne conference in May, in the wake of the April news that his company had been acquired for $350 million.

Now, in late June, Red Hat reported on June 28 an 11 percent year-to-year gain in profit in its most recent quarter, yet fell slightly short of analyst's expectations, driving the stock down 5.5 percent for the day, to $23.64.

It fell an additional 10 percent on the morning of June 29, dropping to $22.64. The company retains a market cap of more than $4 billion, which may be dangerous territory for a company running at an annualized revenue run rate in the $320 million range. The company's P/E ratio remains in the lofty neighborhood of 55, even after the recent precipitous drop.

What's going on? Analysts generally remain bullish on the stock, yet one must remember that analysts remained bullish on most tech blue chips during the dot-com bubbleburst era as well. Regarding Red Hat today, one analyst, for example, Pacific Crest Securities analyst Brendan Barnicle,  that the company's results were  "outstanding."

Red Hat's disappointing profits were blamed in some quarters on negative exchange rate impacts, stock compensation expenses, and taxes. Yet buried in all the initial reporting on Red Hat's results were expected, ongoing "profit dilution expectations" related to the JBoss acquisition. In other words, the JBoss division's performance is expected to continue to be a drag on Red Hat's profit picture.

Add to that some legal trouble in the form of a lawsuit from Boxborough, Mass-based FireStar Software. This company alleges that the JBoss Hibernate 3.0 persistence engine (part of the company's popular JEMS software) infringes on a FireStar patent that was issued in the year 2000.

The FireStar patent is said to be quite broad and may affect several i-technology companies if violations are determined to have occurred. But for now, JBoss/Red Hat is the sole target of the suit, which seeks unspecified damages.

Add it all up and the April deal is worth less. The purchase price was $350 million (with an additional $70 million potential from future performance), but 40 percent of the $350 million was in the form of Red Hat stock. The stock was in the $30 range when the acquisition was announced, but has dropped about 25 percent since that time, resulting in a loss of $35 million in the purchase price.

Oracle's Larry Ellison and the management teams at both BEA and IBM, all of whom were considering the purchase of JBoss earlier this year, must be smiling today.

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Red Hat News Desk trawls the world's news information sources and brings you timely updates on its flagship Red Hat Enterprise Linux as well as the company's other product lines including database, content, and collaboration management applications; server and embedded operating systems; and software - including its most recent virtualization offerings.

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SYS-CON Australia News Desk 07/03/06 12:20:44 PM EDT

JBoss CEO Marc Fleury donned his 'red hat' and was all smiles shortly after the April announcement that his company had been acquired by Red Hat Software for $350 million. But it's Larry Ellison and others who passed on acquiring JBoss who are smiling today.

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