Red Hat buys Israeli virtualization co Qumranet

The Linux company will pay $107 million for Qumranet, its first acquisition in Israel.

Red Hat Inc. (NYSE: RHT) today announced its acquisition of Israeli virtualization start-up Qumranet Inc. for $107 million, ending a long period of rumors. This is Red Hat's first acquisition in Israel, and it will turn the Linux software company into a market leader in virtualization. Qumranet will become Red Hat's R&D center in Israel.

On Sunday, Red Hat president and CEO Jim Whitehurst and CTO Brian Stevens, are due to arrive in Israel as guests of "Globes" and Matrix IT Ltd. (TASE:MTRX), Red Hat's local representative. They will presumably visit their new asset as well.

Qumranet was founded in 2005 and is one of the more interesting companies in the Israeli high-tech landscape. The interest is not only due to the company's business of using open code to develop virtualization technology for PCs, but also because of the men behind the company.

Qumranet co-founders are CEO Benny Schnaider, president Rami Tamir, CTO Moshe Bar, and chairman Dr. Giora Yaron. All four men are well known, with proven track records of high-tech entrepreneurial success. They have been involved in a number of exits, including PentaCom and P-Cube, which were acquired by Cisco Systems Inc. (Nasdaq: CSCO) for $318 million altogether.

Schnaider, Tamir, and Bar are expected to head Red Hat's Israeli R&D after the acquisition. Ra'anana-based Qumranet has 65 employees worldwide, mostly R&D staff in Israel. The company has raised $20 million in two financing rounds from its founders, Sequoia Capital, Norwest Venture Partners, and Cisco. The company still has cash from its latest financing round, which was held in January.

In recent months, there was talk that Qumranet would be bought by Cisco, or that the two firms would collaborate, in a move that would formally bring Cicsco into the virtualization field. Shnaider told "Globes" today that "Joining with Red Hat was much better for us than with Cisco."

The concept underpinning Qumranet's Solid ICE platform is an Independent Computing Environment (ICE) that enables enterprises to host desktops in KVM virtual machines on servers in the corporate data center, and allows users to connect to them via a remote protocol called SPICE. Solid ICE includes management, security, and communications solutions for virtualization of PCs. Since this requires open source code, which can be adapted for this purpose, Qumranet solution uses Linux.

Qumranet's target market is PCs, in what the company calls "server-side desktop virtualization", which means hosting virtual machines on an enterprise's servers. This enables the running of a range of operating systems (not just Linux) or virtual computers using the hardware of just one PC.

Qumranet plans to introduce its virtualization technology on PCs themselves (the client side). This market is still in its infancy, and was the reason for Microsoft Corporation's (Nasdaq: MSFT) acquisition of Kidaro Ltd. earlier this year.

The acquisition of Qumranet creates a successful exit for the venture capital funds that invested in it. On the basis of the preferred shares and 40% stake in the company, Sequoia and Norwest Partners will make a three-fold return on their investment and will also receive the balance of Qumranet's cash from the last financing round.

Red Hat and Qumranet began collaborating a few months ago. As a global Linux leader, Red Hat and Qumranet have an obvious common interest in promoting the Solid ICE solution. Collaboration will boost Qumranet's market share and enable Red Hat to enter a new market where there are already a number of leading players.

When asked at what point did the collaboration turn into an acquisition, Tamir replied, "This is not a linear equation. We've been in contact for a long time, and at some point the talks turned to acquisition. It was a very natural link-up."

Published by Globes [online], Israel business news - - on September 4, 2008

© Copyright of Globes Publisher Itonut (1983) Ltd. 2008

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