Red Hat shares triple in IPO

Red Hat shares triple in IPO

By Stephen Shankland, Staff Writer
CNET

August 11, 1999

The initial public stock offering for Linux software maker Red Hat exploded today as share prices tripled in value, closing at 52.06.

Red Hat shares, trading under the symbol RHAT, were priced initially at 14 but quickly began to climb. The success of the first day gives the company a capital value of around $3 billion. By comparison, most recent IPOs have been rather tepid, with share prices rising only a few dollars or sinking below the asking price.

The company released 6 million shares under the sale. The stock offering was designed to raise between $60 million and $72 million to finance Red Hat's expanding operations. It has instead rasied about $84 million.

The Red Hat IPO has been seen as not only a seminal event for the Durham, North Carolina-based company but also an important test of the open source operating system's broad appeal. Red Hat's success could pave the way for VA Linux Systems, Caldera Systems, Linuxcare, and Cygnus Solutions to go public as well.

The explosive start shows that investors are clearly keyed into Red Hat and the open source movement.

At the same time, questions about the overall business prospects of Linux companies will likely come up. Among them, should Red Hat be considered a software developer or service/consulting company? And how successful can a company be when it doesn't control its basic software code and similar products are available for free?

"It's really the first test case for Linux in the broader public marketplace," said Brian Behlendorf, a leader of the open-source Apache Web server project.

"I think several others will follow," said TurboLinux chief executive Cliff Miller in an interview yesterday. His own company hasn't laid specific plans for an IPO soon, Miller said.

But the Red Hat IPO comes amidst a gloomy climate, as technology companies have been watching their stock prices drop. Then there is the peculiar nature of so-called open source software, which is collaboratively developed by anyone who wants to contribute, allowing for many novelties to creep in.

To try to assure a fast pace of Linux development, Red Hat has funded top Linux programmers such as Stephen Tweedie, Alan Cox, and David Miller and has supported the Gnome effort to improve the user interface choices for Linux. But Red Hat's future and the future of its products hinge not only on its own programmers but also on work done by other companies and the open-source programming community at large. For example, the development of Linux for Intel's upcoming 64-bit "Merced" chip incorporates programmers from HP, IBM, SGI, Intel, and Cygnus.

The issues of sharing software are familiar to Caldera Systems chief executive Ransome Love, whose company yesterday released as open source the Lizard Linux installation utility. Love said today he sees the Red Hat IPO as "a rising tide that lifts all boats," and a move that could make it easier for Caldera to "come in with its own strategy."

Dominant version of Linux
Market researcher IDC and others say Red Hat is the dominant version of Linux, but its leading position isn't guaranteed. Red Hat's revenues dipped in the most recent quarter, the time when all the Linux distributors were offering new versions with upgraded core software. During that shift, Red Hat was the only major distributor to raise its price.

When the company first filed to go public, it reported revenues of $3.5 million for the quarter ending February 28. But in an amended statement including the quarter ended May 31, that revenue dropped to $2.7 million.

Red Hat plans to use the funding to expand its international operations, its Linux portal site, and its service and support business.

Then too, Red Hat finds itself in the interesting position of being subject to a legal framework (called the Gnu General Public License) that allows rival companies to adapt Red Hat-developed software and sell it themselves. Indeed, Mandrake Linux, marketed by Macmillan Software (a division of the famous publishing company), is being touted as based on Red Hat but made easier to use, according to the developers.

But Red Hat is going public at a time when Linux is making inroads into the business world. The company is betting its future on corporate needs for technical support for Linux, either for relatively simple technical support or more complicated consulting services.

That services business right now is a small fraction of Red Hat's revenue, which is dominated by more conventional sales of copies of Linux. But Red Hat says the services business is key to its being able stand out from other Linux companies.

Curiously, Red Hat and VA are converging toward this model of offering sophisticated services.