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TELECOMS AND SOFTWARE NEWS
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The end is nigh for Novell
Laurent Lachal
The end is nigh for Novell
After years of acquisition rumors, last week Novell received a buy-out offer from hedge fund Elliott Associates (EA). Whether the offer succeeds or not, Novell is likely to end up in pieces. Not much of an offer, and unlikely to increase significantly
EA started buying Novell shares on 5 January 2010, and currently has an 8.5% stake in the company. Last week it offered to acquire Novell for $5.75 per share ($2 billion). Considering that Novell had $991 million in cash at the end of its last quarter ended January, and no debt to speak of, this does not value Novell very highly. It reflects the little faith that Wall Street has had in the company during the past few years, owing to Novell's continuing poor performance despite constantly renewed efforts to pull itself together (the latest effort happening in December 2009 with a restructuring under the new “intelligent workload management” banner). A better offer is likely to follow, but it will not be significantly better. Investors, who brought the share price above $6 on the very high volume of trade the day following the offer, have currently settled down to a share price of $5.81. Elliott is an unlikely candidate; Novell an unlikely target
The market expected an IT company to eventually take Novell over. Instead, the suitor is a 33-year-old successful hedge fund that manages more than $16 billion of assets, an opportunistic organization that likes to “address complex investment situations” (as it puts it in its letter to Novell's board). Novell is an unlikely target though: EA usually targets distressed, bankrupt, and heavily indebted organizations (it sees the current economic crisis as an opportunity) and nations (its action against Peru and Congo attracted the condemnation of many, including Gordon Brown, and established its status as the king of the 'vulture funds'). However, it is not the first time that the organization has targeted a software company: in 2008 it made an offer, eventually rebuffed, for Epicor.Novell's parts are more valuable than its sum
Novell's board is likely to reject the current offer before Novell's annual conference, BrainShare, starts on 21 March. It can keep rejecting EA's offers, but it cannot stop EA from going directly to Novell's shareholders. Should EA be successful, it is likely to pocket Novell's cash then split the company and sell its constituent parts.Many expect an IT company (either solicited by Novell's board or not) to jump in and make a counter offer. Those considered include Cisco, Computer Associates, Dell, Google, Hewlett-Packard, IBM, Oracle, SAP, VMware, and even Microsoft (although the conspiracy theorists do see Microsoft's dark hand behind the whole affair). We do not believe that any of these companies will want to take Novell on board as it currently is. They are likely to wait for EA to dismember Novell and then pick up the pieces that interest them. As part of its strategy to rebuff EA's efforts, Novell's board may well offer to dismantle the company itself so that all profits end up in its shareholders' pockets rather than EA's.Linux is not the only jewel in Novell's crown
Many consider Novell's Linux business to be the jewel in the company's crown, but its identity and access management (IAM) portfolio is also very strong. Its system management portfolio is also potentially attractive, although it needs more integration work. The Linux business is likely to be the first to go: too many vendors have an interest in the Linux market remaining a duopoly. IBM is the most likely to pick up that piece. After all, it is the one that nudged Novell into buying Suse for the very purpose of creating a Linux market duopoly (and Suse Linux remains the Linux version of choice for IBM mainframe users). CA is a good candidate for the IAM and/or system management portfolio. EA could also be interested in Novell's patent portfolio, to resell for profit, and is likely as part of its due diligence process to look at Novell's current legal fights with SCO (for the ownership of Unix copyrights) and Microsoft (around unfair competition claims related to WordPerfect).
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