Why Microsoft Should buy Red Hat

Some background: Matt asked "Why doesn't Oracle just buy Red Hat?" I explained why Oracle would not buy Red Hat Luis Villa replied to Matt's question: "Because Red Hat employees would leave en masse." Microsoft announced fiscal 4Q07 growth of 13% on Thursday (or 16% if you only count their true software revenue - which falls into the "Client", "Server & Tools" and "Microsoft Business Division" reporting cate

Some background:

1. Matt asked "Why doesn't Oracle just buy Red Hat?"
2. I explained why Oracle would not buy Red Hat
3. Luis Villa replied to Matt's question: "Because Red Hat employees would leave en masse."
4. Microsoft announced fiscal 4Q07 growth of 13% on Thursday (or 16% if you only count their true software revenue - which falls into the "Client", "Server & Tools" and "Microsoft Business Division" reporting categories). Microsoft crossed the $50 billion total year revenue mark with the close of fiscal 2007.
5. I compared Red Hat's stock performance over the past year vs. some Traditional software vendors (see below)

If you're still with me....

Red Hat is growing and executing well. Financial analysts expect Red Hat to hit $517M this year (fiscal 2008, ending Feb. 2008), and $631M in fiscal 2009. At this pace, Red Hat should cross the $1 billion revenue mark in fiscal 2011. Red Hat may well be the gorilla in the Open Source marketplace. But after everything is said and done, that marketplace is tiny in comparison to the total software market. If you believe in the stock market's ability to predict a company's future value, one could argue that Red Hat investors are in a "sit tight" mode right now. At a P/E of 72 and PEG of 1.44 (vs. Google's PE of 45 and PEG of 0.99), Red Hat's stock has likely priced in as much growth and "great news" that we could think of. Few doubt Red Hat's position in the overall OSS market, but some may be waking up and asking whether being #1 in 1.8% of the software market is enough to drive the multiples that Red Hat shares enjoy today.