AOL, Red Hat mum on talks

January 21, 2002 Posted: 1813 GMT

NEW YORK (CNN/Money) -- AOL Time Warner and Red Hat had no comment Monday on a report that AOL is in negotiations to buy the Linux specialist.

Citing unnamed sources, the Washington Post reported in its Saturday edition that AOL (AOL: down $0.46 to $29.58, Research, Estimates), the parent company of CNN/Money, was negotiating a buyout of Red Hat, which specializes in the Linux operating system.

Red Hat (RHAT: Research, Estimates) is the largest distributor of Linux, an operating system that in recent years has emerged as a budding rival to the ubiquitous Windows operating system from Microsoft.

Linux is an "open source" operating system. That means the underlying code that makes it work is available for anyone to view and modify, as long as they share their modifications with the rest of the open-source community.

So far, Linux has made the most headway in the corporate market, especially to run servers, which are the powerful computer systems that do everything from keeping track of credit-card accounts to storing Web pages.

Heavyweight computing companies such as IBM (IBM: Research, Estimates), Hewlett-Packard (HWP: down $0.92 to $22.61, Research, Estimates) and Compaq (CPQ: down $0.28 to $11.52, Research, Estimates) recently have thrown their weight behind Linux.

But many of the pure-play Linux companies that emerged in the late 90s have struggled to find a profitable business model.

VA Linux (LNUX: down $0.08 to $2.40, Research, Estimates), for example, which had a record-breaking debut when it went public on Nasdaq in December 1999, has gone from being a "Linux solutions" provider with a range of products and services to focusing specifically on selling software and support services that help large corporations develop specialized software more efficiently.

For its part, Durham, N.C.-based Red Hat has survived to become the leading commercial supplier of Linux, building a core following in the Web server market, deriving revenue primarily from the accompanying technical manuals and attendant services it offers.

The company also has been branching into new areas of services, such as custom application development, as well as new applications for database management and e-commerce.

Even so, Red Hat has not turned a profit since going public in 1999. The company reported a $15 million loss in its latest quarter, an improvement from a $55.3 million loss in the previous quarter.

Red Hat was founded in 1994 and went public in 1999, with its stock soaring from $14 to a high of $286.25. The stock price fell as the technology stock bubble burst, but it's made a minor comeback recently.

The Washington Post report said negotiations still are fluid, and it did not say how much AOL would be willing to pay for Red Hat. At the close of trading Friday, Red Hat's market capitalization stood at $1.42 billion.

Nearly all the subscribers to AOL's online service, the nation's largest, use desktop computer software that runs on top of Microsoft's Windows operating systems.

In fact, the number of potential users who currently use Linux is a very small fraction of the market at the moment. But the service could easily be configured to run on Linux, as an Internet appliance offered by Gateway did until it was discontinued last year.

By taking Red Hat into its fold, AOL also would strengthen its position in a growing battle against Microsoft as each moves its services beyond the personal computer to mobile devices and such nascent services as interactive television.