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Red Hat investors in delicate position

Intel and other high-tech companies, firms with close ties to Microsoft, stand to reap a bonanza when Red Hat and its competing OS goes public.

When it comes to investments, shareholders can make strange bedfellows.

That's the case with Red Hat, which recently filed to go public. Red Hat distributes and supports a version of the Linux operating system, the most popular version, in fact.

One of the company's corporate investors--Intel--is expected to reap a bonanza from its investment in Red Hat. The chip giant currently holds a 5 percent stake in the company, which expects to raise upwards of $96.6 million, based on its registration filing fee.

But while Intel stands to make a tidy return on its investment, the chipmaker ironically has also invested in a company that is expected to go head-to-head with its giant partner Microsoft. Red Hat's Linux competes with Microsoft's core business of operating systems.

Intel, however, is not alone. Other close Microsoft partners who have made investments in Red Hat include computer makers Compaq Computer and Dell Computer. These companies, which made their minority equity investments earlier this year, did not disclose the degree of their investment stakes.

Corporate investors, unlike venture capital firms that mainly focus on bringing the greatest return to their investors, tend to concentrate on taking stakes in companies where there is a strategic benefit to the arrangement. And in some cases, it means taking a stake in a competitor, as well.

Red Hat, for example, has also attracted corporate investors that are also its competitors. Novell and IBM are two examples.

"We face significant competition from larger companies with greater financial resources and name recognition than we have," stated Red Hat in its filing with the Securities and Exchange Commission. "These competitors include Microsoft, Novell, IBM, Sun Microsystems, and The Santa Cruz Operation, which offer hardware-independent, multi-user operating systems for Intel platforms, as well as (original equipment manufacturers) such as AT&T, Compaq, Hewlett-Packard, IBM, Olivetti, Sun Microsystems, and Unisys, which offer Unix-based operating systems."

Red Hat further noted that many of these companies bundle competing operating systems with their hardware, making it more difficult to penetrate their customer base.

Other Red Hat investors, which in some cases are Microsoft foes, include Oracle and Netscape, which has since been acquired by America Online.