Novell seeks rich suitors

Private buyers line up

It looks like Novell has formally put itself up for sale after rejecting the entreaties of a hedge fund two months ago.

According to a report in the Wall Street Journal and confirmed by a separate report from the New York Times, Novell had asked for suitors looking to eat the company to put in initial bids by the end of this week. The Journal report says that Novell's board would then play The Dating Game, selecting some of the bidders and asking them to give their final offers at some future date.

Ian Bruce, Novell's chief spokesperson, would not comment on the matter. But he did laugh when El Reg suggested that whatever Novell does, would it please do something that wasn't boring.

The Journal report says that more than 20 different companies have said they were interested in Novell, and apparently all of the serious bidders are private equity companies and not Novell's IT vendor peers.

In early March, a New York-based hedge fund called Elliott Associates offered Novell $5.75 per share to take the company private after amassing an 8.5 per cent stake in the firm. That was actually not a very generous offer, the way Wall Street does math, considering that Novell had $991.3m on cash and equivalents and was on track to make maybe $825m in revenues for the year and maybe something around $80m in profits in fiscal 2010. The math that El Reg did back in March hasn't really changed much. Back then, the Novel cash pile was worth about $2.82 a share, so Elliott was really trying to get Novell for around $2.93 per share, or just a tad over $1bn.

Novell's top brass, as anyone could predict, snubbed Elliott's takeover offer after mulling it over for three weeks. At the time, Novell also said it was weighing its options, including stock buybacks, dividends, strategic partnerships and alliances, joint ventures, recapitalization, and selling the company entirely.

With its Linux business finally at break-even, Novell likes to think it is worth more than what Elliott is offering. But with its NetWare business collapsing and revenues for the company overall trending downward year after year and profits either thin or not there at all, Novell may have an exaggerated sense of what it is worth — much like Sun Microsystems did when it put itself up for sale by opening up talks with IBM back in November 2008, which ultimately resulted in Oracle paying $7.4bn (about $5.6bn net of cash and debts) for the company.

Why Novell thinks it is worth more than $1bn is a bit of a mystery, when you look at the numbers and the pressures it is under. Just like it was a bit curious as to why Sun figured it was worth more of a premium than IBM was willing to pay. Good products and intellectual property are important, but IBM has plenty of those, just like Oracle does. Which is why neither IBM nor Oracle will buy Novell for these reasons — though they might buy Novell to keep it out of another vendor's hands and milk the legacy customers to pay for it.

Dell and HP could use their own Linux stacks, but being owned by Dell or HP would not make the SUSE Linux business any more profitable and might in fact hurt it quite a bit because of the loss of vendor neutrality. Applications, consumer preferences, and inertia drive Linux sales; hardware platforms do not. So any company thinking about buying Novell should instead start rifling through the couch cushions to get the change together to buy Red Hat, the clear Linux leader.

If Novell were growing by even a few points and throwing off 15 to 20 per cent of revenues as profit, you could make the case for Novell being worth more. Maybe even a lot more. But so far, Linux has not filled in the NetWare gaps, which leaves Novell treading water, using legacy profits to pump up unprofitable open source businesses. Hope springs eternal, but private equity and investor patience does not. ®

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