Original URL: http://www.theregister.co.uk/2010/09/15/novell_buyout_rumor/

Novell breakup and sale imminent, says report

SUSE Linux to VMware?

By Timothy Prickett Morgan

Posted in Financial News, 15th September 2010 17:35 GMT

Commercial operating system maker Novell is close to selling itself off after breaking it into two bits, according to the is New York Post.

Citing unnamed sources, the Post says a "strategic buyer" will shell out cash to acquire the SUSE Linux business that Novell paid $210m for in November 2003. That Linux business has just finally made it to break-even, according to Novell, and will by our estimates generate maybe $145m in revenues in fiscal 2010. (Novell brought in $108.2m in Linux platform sales in the first nine months of fiscal 2010 ended in July).

Another private equity firm is rumored to be taking the rest of the company, including the NetWare operating system, Novell's security and access products, and its systems management tools. It is unclear what will happen to the hybrid Open Enterprise Server, which runs NetWare services on the SUSE Linux kernel, but it seems likely that if such a deal came to pass, the second company would license SUSE Linux and pay royalties to the first so as to continue to sell and support OES. It is unclear where products such as the new Cloud Manager, announced this week to manage private and soon public cloudy infrastructure, would end up.

As El Reg previously reported, Novell has been seeking rich suitors since it rejected a takeover bid by New York hedge fund Elliott Associates in late March. In early March, Elliott Associates offered $5.75 per share, or $940m net of Novell's cash hoard, to acquire Novell and take it private. According to various rumors, more than 20 potential suitors have taken a look at acquiring some or all of Novell's assets. The word on the street was that the deadline for potential bidders had passed a few weeks back, but Novell refuses to discuss any of this until its board approves a course of action.

Ian Bruce, Novell's chief spokesperson, would not comment on any pending acquisitions.

The Post sources would not reveal who the buyers are, but tongues are already a-wagging on Wall Street that it will be server virtualization juggernaut VMware. Oracle and Red hat have also been bandied about as potential SUSE Linux buyers. And IBM and Hewlett-Packard might finally want to own their own Linuxes, too.

The buyout plan apparently is for both bits of Novell to be sold off at the same time - provided the deal does not fall apart, of course - and for Novell to be delisted on the NASDAQ stock exchange. Novell's shares were trading at $5.57 a piece after yesterday's close, and are up 6 per cent to $5.90 a share as El Reg goes to press.

If you break Novell into two revenue streams for fiscal 2010, you get a SUSE Linux business of around $145m that doesn't make any money and a legacy NetWare and GroupWise business plus security and access software products that bring in around $660m in sales and maybe $70m in net income. If you want to b generous, you could value that SUSE Linux business in parallel with Red Hat, which had $783m in revenues in the trailing four quarters and $92.8m in net earnings.

Red Hat has a market capitalization of $7.3bn, and that is a 9.3 to 1 ratio between market cap and sales. Novell's SUSE Linux biz is not profitable and cannot be made easily so, unless you are VMware and you anoint SUSE Linux your Linux of choice. So maybe a company like VMware would have to shell out something on the order of 5 to 1 to get SUSE Linux. Call it $725m, then. Now offset that against the cash a company like VMware would be due, which would be 18 per cent of the current $1.04bn cash pile, or $188m. So the net cost would be somewhere around $537m.

It is hard to imagine the legacy NetWare/GroupWise and security and access control products fetching much more than one times annual revenue, but the cash pile for this side of the business would be $749m. So you're talking a $1.4bn potential valuation on the back of an envelope. It seems generous to even pay that much for these businesses, but private equity firms that take control of companies are not afraid to slash costs and jack prices to make it all back.

The Post says that whatever deals are cooking could close in three to four weeks. ®