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Rob Enderle

There is a $1 billion offer on the table to buy Novell from Elliott Associates. The company's financial performance doesn't support this kind of price (it is 115 percent over the value of Novell as of January 4th). The investors making the bid are known for flipping companies -- basically repackaging them to turn a nice profit rather than run them long-term. Now, after the dust settled in the SCO litigation, it appeared that Novell owned the key intellectual property in question. Is there a chance these investors are looking to try to hit the jackpot as SCO did or any other reason that Linux or other open source offerings are at higher risk? If so, or if not, who is the most likely company to acquire Novell and why? Let's explore that today.


By the way, Andrew Updegrove takes an interesting look at this, as well, and adds Oracle to the mix of potential buyers (I think Oracle will need to digest Sun first, but he could be right).


Novell Today, SCO Tomorrow?


This would seem an unlikely outcome. As SCO demonstrated, the path of litigation, while apparently very attractive, is also very expensive. It requires a set of skills that SCO's management clearly didn't have. The investing group behind this deal doesn't appear to be one that lives on litigation. They are known as a group that starts with a small investment in troubled properties and then uses that investment to foment change. This makes it unlikely they would go down a litigation path. The risks are too high and their expertise is more in seeing value that is not realized, making that value more visible, and then finding a buyer.


Novell's Value


Novell's IP lies at the core of solutions provided from companies that include IBM, HP, Dell, Google and Microsoft. Any change in the operation of the company could adversely affect, in some cases to a significant degree, the ongoing successful operations by any and all of these companies, with the exception of Google. But Google may actually value Novell higher than any other firm and, if Google's value is high, Microsoft could take an interest. Let's start with the hardware OEMs.




All of these companies have programs to package and sell Novell and Red Hat offerings. These offering form the core of each company's Linux efforts. Dell, because it's still competitively light on services, likely has the highest dependency on Novell's own service organization. HP and IBM would likely prefer to deny the other access to Novell's solutions to get a higher percentage of the available income.


However, all know that if one of them buys the firm, the available market for the solutions drops dramatically because the cross-vendor advantage that Novell now has would slowly evaporate. Only IBM, of the three, has a software operation that could absorb Novell easily, reducing the cost and the risk of doing the acquisition. This fact makes it the most likely to make the initial move. However, having seen Oracle steal Sun from it and feeling, in hindsight, kind of glad it did (given how badly that acquisition has gone), it seems doubtful that IBM can get the approvals it needs to buy Novell. It might find Red Hat a more economical path, given that IBM doesn't have a great desire to acquire Novell's greatest asset, its Microsoft partnership.




Google's solidly on an open source path; owning the key IP underneath many of its offerings would likely give it some valuable piece of mind. However, the greatest value to Google would likely be in breaking the Novell/Microsoft relationship, while using Novell/Microsoft contacts and Novell enterprise sales presence (to both IT and the OEMs above) to jumpstart into the enterprise business (particularly in Microsoft accounts it wants so badly). In one step, it would do Microsoft considerable damage and put itself in a position that it otherwise would take them years, if not decades, to accomplish. Packaged right, Novell could be very attractive. However, Google is on this silly one-acquisition-per-month plan and that likely makes it much harder to make reasonably large acquisitions like this one. Don't forget, Google's CEO used to run Novell (badly) and likely knows it better than most.


Microsoft Counter


Buying Yahoo would effectively put the company out of business unless a credible arm's-length relationship could be created. Structurally, such a thing is possible. From a perception standpoint, doing such an acquisition successfully, defined by retention of the customer base, would be incredibly difficult. Microsoft couldn't even effectively buy Novell to shut it down to deny Google the relationship. Key Novell employees would likely cross over to Google, allowing that company to gain most of the benefit for a fraction of the cost of purchase. Antitrust limitations are likely to kick in as well, reducing Microsoft's reasonable counter-strategies significantly.


OEM White Knight?


Lenovo, Acer, MSI or another Microsoft partner could step in and take Novell to help Microsoft (which could co-fund) deny Google the property and to become closer to Microsoft. But many of these companies also may want to have a Google relationship, and such a move would make such a relationship problematic. However, the end result for these firms, which currently don't have much software, could better match up against Dell and HP, and create an additional partnership opportunity with IBM for group efforts. This seems the best path for a Microsoft counter because it maintains the arm's-length relationship, allows the partnership to continue and possibly even be enhanced, and seems to avoid most antitrust exposures.


Wrapping Up


Novell is clearly in play and has a high intrinsic value both for its intellectual property ownership and connection to UNIX/Linux. Mining that potential will require a good deal of finesse and the greatest benefit would be had by a combination of the unique Microsoft relationship, enterprise engagements, and intellectual property. It seems unlikely that Novell's board will turn down this offer, given what happened to Yahoo when it turned down a similar deal. As a result, Novell being sold seems all but certain; who will eventually own the company is still largely up in the air. However, neither open source nor Linux is in any significant near-term danger; long-term all depends on who the eventual buyer is and what they intend to do with the property. One thing is sure; Novell will be changing a great deal over the coming months.

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