Novell for Sale: Another SCO Moment Coming?

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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Mar 5, 2010 11:28 AM David Harris David Harris  says:

I saw this on Novell's website yesterday and did a little research on it.  I like most of your points, Rob. 

I have been advocating a Novell - Sun - Oracle merger for over a decade, but what do I know ... I'm not running those companies!  Now that 2 of those 3 are merging, it would be interesting to see what Oracle would do with Novell, too. 

I see a software company taking a larger interest than a hardware company, and I'm not sure why.  IBM doesn't really have anything to benefit from buying Novell, but I think Dell might use Novell to push into the enterprise space.  HP could absorb Novell, would would anything good (for the industry) come out of that?  (Can anyone name more than 2 good things that came from the HP-Compaq merger?  3, anyone?  3?)

I think a software security company could benefit ... McAfee has been doing alot in the security space, and could be a potential suitor.  Google has history with Novell (I liked what Eric Schmidt did for Novell in the late 90s), even if they aren't business partners now.

I don't see Microsoft or Yahoo even remotely interested.  Or Cisco.  I can hear them yawning now, and smiling like the Cheshire cat. 

I guess the bottom-line is who benefits from Suse Linux the most?  If Elliott sold-off Novell piece by piece, I think all of the companies you mentioned would be interested in buying some of Novell's intellectual (and physical) property.

Just my $0.02,


Mar 5, 2010 12:02 PM Rob Enderle Rob Enderle  says: in response to David Harris

Thanks, yes it will be interesting to see this play out.   

Mar 11, 2010 11:49 AM Tim Wessels Tim Wessels  says:

I think you made a couple of factual errors in your blog post.  I believe Elliott Associates, which owns 8.5% of Novell's outstanding shares, is offering $2B not $1B for the company.  BTW, Novell has cash and short term assets of almost $1B as reported in their most recent quarterly financial report.  And the case of SCO v. Novell is not quite over.  Even though SCO is in Chapter 11 and the bankruptcy attorney fired the litigious Daryl McBride, Novell faces a jury trial to determine which company owns the Unix and Unixware copyrights.  In August 2007 a Federal District Court judge in Utah did rule in Novell's favor on copyright ownership, but in a last ditch appeal by SCO, a Federal Appeals Court granted them a jury trial in the matter of the copyright ownership.  The jury trial began on March 8th, 2010 in Salt Lake City.  So we might get a jury verdict before too long but I'm not holding my breath.

As a long time reseller partner of Novell and observer of the company going back to 1984, I've seen previous acquisition efforts fall prey to something...Jim Manzi of Lotus backed out at the 11th hour over representation on the BOD of the merged companies...Novell wanted an equal number of seats and Lotus did not.  Of course there was the famously reported attempt by Bill Gates to buy Novell that alienated the late Ray Noorda from Gates when he felt that Gates had double-crossed him on the deal.  Then there were always rumors that IBM would buy Novell.  After all, at one time IBM was selling "blue box" NetWare.

So I would not bet that the most recent offer to acquire Novell will succeed either, especially since it is not a technology company courting Novell, but just a shareholder firm who want to profit by selling off the company's intellectual property and making off with Novell's $1B in cash and short term assets. 

Also, I think you unfairly dismissed Dr. Eric Schmidt's tenure at Novell.  When he got to Novell in 1997 it was a mess.  Dr. Schmidt focused Novell on replacing IPX with TCP/IP in NetWare and ran with an employee project called ZENworks, which will celebrate its 13th anniversary this year.  And Dr. Schmidt directed Novell engineering to make eDirectory (formerly called Novell Directory Services) multi-platform and not a NetWare-only directory service.  Today eDirectory runs on NetWare, Linux, Windows, Solaris and AIX.  Dr. Schmidt came to Novell from Sun Microsystems where he knew all about SunOS (Unix).  I don't think when he left Novell in 2001 that he left the company in worse shape than when he got there.  I think it was Jack Messman and  Cambridge Technlology Partners that did much more damage to Novell.

Mar 11, 2010 12:02 PM Rob Enderle Rob Enderle  says: in response to Tim Wessels

I had $2B first but the story I was reading said $1B so I changed it in pre-edit.  Thanks for the catch.  I know the SCO stuff is in play, but I'm not holding my breath either.  Generally I hear SCO and I look for a table to hide under these days.

I think the issue with Eric was he was a poor match as CEO, you are right he did better than others, but acted as more of a CTO refining some products.  Novell needed a major change, more of a turn around specialist and Eric wasn't that.  I actually had dinner with him after he first got the job and he clearly wasn't CEO material yet.  Didn't have the breadth required to do this kind of job.  My issue with Eric isn't that he is stupid, but that he seems to constantly be in the wrong job for his talents.  There are a lot of CEOs like this unfortunately.

Agreed it wasn't in much worse shape but it wasn't in much better shape either. 

Appreciate the post, what I'd heard on the Novell/Microsoft fallout was that Novell got cold feet for fear of anti-trust problems.  Your story makes more sense to me actually as why would Novell care about anti-trust, that would be Microsoft's problem. 

Mar 14, 2010 6:39 PM Eric Sarjeant Eric Sarjeant  says:

This might be better titled "Novell for Sale: What's Linux Worth?". There have been a number of Linux powered failures, but now there are only three major commercial players in the Linux market (Novell, Canonical and RedHat).

Granted, just about everybody else has a flavor of Linux available (IBM and Oracle inclusive) but the market is defined by these big-three.

If Novell is sold, this will put a pricetag on Linux. A bigger number here is better for both RedHat and Canonical.  If Novell cannot be sold then that will be a strong indicator of what's to come for commercial Linux distribution and support.

Mar 14, 2010 7:04 PM Tim Wessels Tim Wessels  says: in response to Eric Sarjeant

I think a price tag has already been established for Linux.  If you remember back in late 2003, Novell acquired SUSE and the price tag was approx. $300M.  Since then I can't recall if any other Linux distro has been sold.  I think Oracle thought about buying Mandriva but cloned Red Hat into Oracle "unbreakable" Linux.  There are other open source projects though, besides Linux, for which substantial prices have been paid in recent years, including:  MySQL sold for $1B to Sun (Oracle), Qumranet the KVM sponsor sold for $107M to Red Hat who also bought JBOSS for $350M, Zimbra sold to Yahoo! for $350M and has since been resold to Cisco? Xensource the commercial sponsor of the Xen hypervisor sold to Citrix for $500M.

And since Novell's SUSE Linux Enterprise Server is the only other data center grade Linux distro out there besides, Red Hat Enterprise Linux, I think there is no question about the value of a commercial Linux distro.  Canonical's Ubuntu Server is clearly not in the same class with SLES and RHEL, especially in terms of support.  Ubuntu may rule the Linux desktop market but I think that is another market entirely.


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