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Red Hat to Buy FuseSource

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In a bid to strengthen its middleware product portfolio, Red Hat Inc. (RHT - Free Report) is set to acquire FuseSource, a provider of open source integration and messaging, from Progress Software Corp. (PRGS - Free Report) . The financial details of the deal were not disclosed, but Red Hat does not expect the acquisition to impact its fiscal 2013 outlook.

Headquartered in Bedford, Massachusetts, FuseSource’s clientele includes Fortune 500 companies like Vodafone Plc (VOD - Free Report) and Lynden to name a few. The product line of the company includes Apache ServiceMix, ActiveMQ, CXF and Camel in the middleware section.

Middleware is the software platform that facilitates the development, operation and integration of open-source applications and other software. Jboss, Red Hat’s Java-based middleware application, allows clients to develop and manage applications in a cost-effective manner.

Being open sourced, it can be easily integrated and customized according to client needs. Red Hat’s JBoss middleware offering is being used by companies in the financials, healthcare and networking sectors, among others.

Red Hat’s middleware products and services would be well complemented by the inclusion of FuseSource’s product line as it would speed up the delivery of its integration products and services, while increasing the flexibility of use for its clients.

We believe that Red Hat is emerging as a significant player in the middleware segment. Red Hat boasts an impressive product line up and expects to invest heavily on the development of innovative products. Red Hat’s expansion in the middleware segment makes sense because around 40% of the top 30 deals of $1 million or more in the last-reported quarter included a middleware component while just 3 were middleware-exclusive deals.

Additionally, the company’s offerings in the cloud computing market and server virtualization are expected to be incrementally beneficial in the long run.

However, we believe that increasing investment may hurt margins in the short term. Moreover, sluggish IT spending and significant foreign exchange volatility will keep the stock range bound.

At the same time, we don’t expect competitive pressures to alleviate given the deep pockets of rivals such as Microsoft Corp. (MSFT - Free Report) , VMware Inc. (VMW - Free Report) and Oracle Corp. (ORCL - Free Report) .

We maintain our Neutral recommendation over the long term (6-12 months). Currently, Red Hat has a Zacks #3 Rank, which implies a Hold rating in the short term.

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