Tech

Linux company SUSE outbids competitors for fast-growing start-up Rancher Labs

Key Points
  • SUSE, a Linux distribution company controlled by private equity firm EQT, has agreed to acquire Rancher Labs, a start-up with technology that helps organizations run software in virtual containers across many servers.
  • Two people familiar with the deal say SUSE is paying at least $600 million. 
  • The transaction suggests that even during a recession, demand remains high for technology that can enable companies to operate more efficiently.
SUSE mascot is a green chameleon.
Francisco Rojas | Flickr

SUSE, a Linux distribution company controlled by private equity firm EQT, has agreed to acquire Rancher Labs, a start-up with technology that helps organizations run software in virtual containers across many servers.

The companies announced the deal Wednesday but didn't disclose the terms. Two people familiar with the deal said SUSE is paying $600 million to $700 million. 

The transaction suggests that even during a recession, demand remains high for technology that can enable companies to operate more efficiently.

Talks between the companies began in the spring, and the process became competitive with additional bids, Ursheet Parikh, a partner at Rancher backer Mayfield Fund, told CNBC on Tuesday. There were "lots of Zoom calls," Parikh said. 

In the past few years, with the rise of start-ups such as Docker, containers became a trendy alternative to more traditional virtualization technology for running applications on each computer server in a company data center. Amazon, Microsoft and other cloud providers came out with services that developers can use to place code in containers, and in 2017 SUSE introduced its own service for managing containers. The companies haven't finalized integration plans as the deal still faces regulatory approval.

Rancher's core software draws on the Kubernetes container management software that Google released under an open-source license in 2014. People have downloaded it over 100 million times, the company said in March, and it claimed annualized revenue growth of 169% in 2019 without specifying a dollar amount. Rancher also offers its own small distribution of the Linux operating system. 

Rancher's customers include American Express, Comcast, Deutsche Bahn and Viasat.

In the world of Kubernetes, Amazon, Google and Microsoft have not moved as quickly as more traditional information-technology companies, said Rancher CEO Sheng Liang, who sold Cloud.com to Citrix in 2011. SUSE is the rare major open-source company that doesn't operate its own cloud infrastructure, Liang said, contrasting it with IBM's Red Hat, for example. That lets it appeal to companies that don't want to be stuck using one cloud. In particular, some companies that compete with Amazon in retail and other areas, such as Walmart, are reluctant to use Amazon's market-leading cloud.

Rancher was founded in 2014 and is based in Cupertino, California, with more than 200 employees listed on LinkedIn. The start-up has raised $95 million from Mayfield, Nexus Venture Partners, Telstra Ventures and other investors. 

"So far we haven't spent two-thirds of it," Liang said of the $95 million. "That kind of gives you an idea of how efficient we've really been. We weren't burning money."

SUSE was founded in 1992 and has operated under Novell and other owners over the years. In March 2019 EQT bought SUSE from Micro Focus for $2.5 billion. Last year, former Salesforce and SAP executive Melissa Di Donato replaced Nils Brauckmann as SUSE's CEO.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC.

WATCH: VMware COO: It's our 'birthright' to own the container movement in digital transformation

VIDEO7:3807:38
VMware COO: We must own the container movement in digital transformation