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Well, here's another potential acquisition that might slip through IBM's hands. New York-based hedge fund Elliott Associates sent a letter to the board of directors of Novell today after the market closed, offering the company $5.75 per share to take the company private.

As Wall Street closed on Tuesday, Novell's shares ended at $4.75 a pop, giving the company a market capitalization of $1.67bn. Elliott, which has $16bn in assets under management and which was founded in 1977, started buying up Novell shares on January 5. The company already owned 8.5 per cent of Novell's outstanding shares when it delivered the offer letter to Richard Crandall, Novell's chairman, and Ron Hovsepian, the company's president and chief executive officer.

As El Reg reported last week, Novell has, after more than six year, finally got its SUSE Linux support business at breakeven, and it is managing to pull out some profits even as its revenues continue to shrink as the NetWare business that made it a powerhouse in systems software in the late 1980s and early 1990s collapses.

As the first fiscal quarter of 2010 came to a close in January, Novell had $991.3m in cash and short-term investments and was probably on track for maybe $825m in revenues for the year and maybe - just maybe - something around $80m dropping to the bottom line. With all that cash, and a chance to cut its way to profits, there is no way that Novell would not eventually become a takeover target.

In its letter to the Novell board, Elliott said that enterprise value - meaning market capitalization minus net cash - was the best measure of the current value of Novell, and that its offer of $5.75 a share - 21 per cent premium over Novell's closing price today - was more accurately looked at as a 49 per cent premium over the enterprise value Wall Street has placed on Novell, net of cash.

That was giving Novell the benefit of the doubt on that cash, since Elliot says a lot of Novell's cash is overseas and may be subject to taxes in the event it actually tries to bring it home and use it. Not that this matters one bit, but the hedge fund says that the $5.75 price for taking Novell private amounts to a 115 per cent premium over Novell's price on January 4, the day before Elliott started scarfing up Novell shares.

If you do the math, that $991.3m in cash and investments represents about 59.5 per cent of Novell's market capitalization, or about $2.82 per share (if you want to be generous with the cash, as Elliott has pointed out), and that Novell itself is really only worth $1.92 per share. (Yes, the cash pile is worth more than the company).

Elliot is offering $5.75 per share, to be sure, but it will get $2.82 per share back as cash, so the net cost is $2.93 per share, or just over $1bn. And Novell's suitor will only have to buy 91.5 per cent of the outstanding shares because it already has 8.5 per cent of them, and that brings the cost to Elliott down to just over $940m. This is a pretty sweet deal for the hedge fund, particularly if it can cut costs, rejigger products, burn the cash, gussy it up, and to flip it to an IBM, an Oracle, or an SAP a few years from now for maybe twice this amount.

"Novell is a long-established company that we have followed closely for a considerable period of time," said the letter to Novell's board, which was signed by Jesse Cohn, the portfolio manager at Elliott Associates. "Over the past several years, the company has attempted to diversify away from its legacy division with a series of acquisitions and changes in strategic focus that have largely been unsuccessful.

"As a result, we believe the company's stock has meaningfully underperformed all relevant indices and peers. With over 33 years of experience in investing in public and private companies and an extensive track record of successfully structuring and executing acquisitions in the technology space, we believe that Elliott is uniquely situated to deliver maximum value to the company's stockholders on an expedited basis."

Elliott is ready to sign confidentiality agreements and begin its due diligence, and it says that the letter is not a legally binding obligation. As El Reg goes to press, Novell is working on a statement to respond to the offer from Elliott and would say no more on the matter. ®

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