LOS ANGELES (AFX) -- Red Hat Inc.'s stock sank nearly 7% on Monday after Oracle Corp. Chief Executive Larry Ellison discussed in a published interview the possibility of distributing Oracle's own version of the open-source Linux operating system.
A direct move by Oracle into the Linux market would place it more directly in competition with smaller Red Hat , while also giving the database and business-software giant a more complete offering to compete against rival Microsoft Corp.
As part of potential Oracle moves in the operating-system arena, it considered acquiring Novell Inc. , provider of SuSE Linux, Ellison said in the interview published by the Financial Times.
Shares of Raleigh, N.C.-based Red Hat fell in the wake of the news as investors mulled the potential implications of an Oracle foray into the Linux market. The stock dropped $2.04, or 6.7%, to close at $28.51. The fall cut into a roughly 12% rise enjoyed by the stock for the year so far.
Conversely, Novell's stock gained 17 cents, or 2.3%, to finish at $7.68, giving the Waltham, Mass., firm a market value of around $3 billion. Those shares have lost around 15% for 2006.
Analyst Terry Tillman at SunTrust Robinson Humphrey said that Red Hat's share could remain under pressure over a 'multiday period' owing to Oracle's potential threat on the Linux market. However, 'in the near term, we see this as just noise and no impact to Red Hat's financial outlook,' Tillman added.
'If Oracle were to make a major acquisition, it seems foolhardy not to believe other major infrastructure providers would not be forced to respond, and a scenario where Red Hat is swooped up is not out of the realm of possibilities,' Tillman observed. The analyst rates Red Hat shares buy with a $38.50 target price.
For his part, Ellison said in the interview that open-source software companies run the risk of watching as their products are absorbed by companies like Redwood Shores, Calif.-based Oracle and others.
'The reason I have a hard time writing checks for billions or hundreds of millions of dollars for things that are open source is that if we could do this, other people could do this too,' he told the paper.
'I don't see how we could possibly buy Red Hat,' Ellison commented. 'I'm not going to spend $5 billion or $6 billion for something that can just be so completely wiped off the map.'
Red Hat's market value tops $5 billion.
While Oracle looked at Novell as a potential acquisition target, the outspoken executive said that such a deal would face the same risks, the FT reported.
Addressing open-source software, which can be freely modified by users and sprung up as an alternative to proprietary software, Ellison said: 'We don't have to fight open source, we have to exploit open source.'
Elsewhere, Goldman Sachs analyst Rick Sherlund downgraded Red Hat's shares to underperform from a prior in-line view.
'We suggest investors be more cautious on the stock near term as Oracle unveils its own open-source stack initiative,' he told clients.
Red Hat last week announced its own deal to acquire closely held JBoss Inc., a maker of open-source middleware products used help software applications work together, for about $350 million. JBoss had been seen as a potential target for Oracle.
Red Hat is 'taking a bold step in expanding its market position to become a broader vendor of open-source software, a step that could expand its market and be very positive for the stock,' Sherlund observed.
'This is a risky period, however, given that Oracle and IBM are unlikely to welcome another Microsoft-like competitor moving up from the operating-system level to deliver a low-cost bundle of integrated infrastructure software,' the analyst added.
Oracle's shares tacked on 6 cents to close at $13.74. This story was supplied by MarketWatch. For further information see www.marketwatch.com.