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"Add Red Hat (RHT) to the shopping list," writes Barron's Mark Veverka. The enterprise-technology company could become an attractive takeover target in the next year or so, as the industry moves to consolidate.

Red Hat is important because it makes Linux, the dominant operating system (other than Windows) preferred by major corporate users. That's why analyst Bill Whyman, of ISI Group, sees the company as "valuable both to own and to keep out of your competitors' control." Whyman sees the usual potential acquirers, including IBM (IBM), H-P (HPQ) and Oracle (ORCL).

However, potential buyers might be put off by the stock's price; at a recent $17.60, the stock trades at around 20 times forward earnings (Feb. 2011) and 4.11 times sales. That makes a deal pricey, especially considering Oracle just picked up Sun Microsystems (JAVA) for 0.5 times sales. Another drawback is that if Red Hat is bought by any of the companies listed above, it could lose value, since shut-out potential acquirers might be hesitant to use Red Hat's services. Still, controlling Red Hat would give its owner 'soft power.'

If Red Hat is snapped up, open-source outfit Novellus Systems (NVLS) could become a target as well, if it isn't one already.

Many analysts are of the view that the enterprise landscape is consolidating, as growth slows, competition increases, and there's greater convergence among companies. As such, Whyman believes Dell (DELL) will likely be involved in a sizable deal soon, and SAP (SAP) is more likely than ever to form a union with IBM or Microsoft (MSFT).

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  • According to Jefferies, Oracle may one day buy Red Hat, but the timing doesn't seem right. Red Hat gained as much as 17% on March 23 on chatter of a bid, but shed 7.3% the next day to close at $15.17.
  • In the FY '08 filings of the 100 largest publicly traded U.S. tech companies, 97% of companies cited strong competition and consolidation risk factors at the top of the list for what's worrying them most.
Source: Red Hat Could Be Red Hot Takeover Target - Barron's