Bonum Certa Men Certa

Ron Hovsepian Receives Another Large Lump of Cash as Novell Sale Looms

Steve Ballmer



Ron Hovsepian as Ballmer



Summary: Coverage of what seems like the inevitable sale of Novell (NOVL) to other hands

LAST YEAR we criticised Ron Hovsepian (Novell CEO) for the fact that he accepted about $6 million in bonuses while firing many SUSE developers whose combined annual wage would also be roughly $6 million. Novell is run by greedy managers mostly for their own benefit it would seem, not really for the interests of the company, its shareholders, its staff, and its vision (GNU/Linux).



A few days ago we found in YouTube this very new video from a nice chap who was laid off by Novell. He learned .NET towards the end of his days at Novell.



So Novell is laying off people. Tough time, eh? Well, not for the Hovsepian family. Ron is receiving an extra $5.7 million for 2009 [1, 2] as though he actually made something special happen. Novell's financial results disappointed investors last week. But anyway, here is where Ron stands:

Novell president and CEO Ron Hovsepian's total compensation fell 17% in 2009, amid declining annual revenue and a wider net loss.

Hovsepian received compensation in fiscal 2009 valued at $5.7 million, compared to $6.9 million in 2008, according to documents filed late last week with the US Securities and Exchange Commission.


The poor guy. 'Only' $5.7 million. What it does not say is that his bonus from last year angered quite a lot of people. It was far too much for far too little in terms of achievements.

Did he perform well?

Well, not quite. In fact, his company is destined to accept a takeover [1, 2], based on most assessments that we found so far. We'll go through them very quickly and as exhaustively as possible. We have looked at many articles and some general background. Here is what seems like a positive article:

Novell Soars on Takeover Offer



Add Novell (NASDAQ: NOVL) shareholders to the list of those who have figured out how to earn money from open source technologies.


But it has nothing to do with SUSE and the price is not high. Here are some other reports that came out first [1, 2, 3] (it's a close call, so it's hard to tell who broke the news) and some of the trailing ones that add:

Elliott is already one of Novell's largest shareholders and owns 8.5% of the company's stock.


The original headline from Reuters has the headline "Elliott Associates, L.P. To Acquire Novell, Inc."

It didn't quite turn out to be certain, so Reuters reported inaccurately. From the WSJ:

Hedge fund Elliott Associates LP, which holds an 8.5% stake in Novell Inc. (NOVL), offered to buy the rest of the software company for about $1.8 billion.


Hours later came a lot of coverage [1, 2] that characterised Elliott's move as merely an offer (see the letter at the bottom of this post -- a letter that Novell confirmed receiving).

From BusinessWeek we learn that:

Elliott Associates LP said it offered to acquire Novell Inc. for $5.75 a share in cash, 21 percent more than the stock’s closing price.


Microsoft's booster Eric Savitz wrote about it too and he obtained a copy of the letter to Novell.

As The VAR Guy points out, it's not clear what this whole thing means to SUSE (he also refers to the recent results).

Just last week, Novell announced mixed financial results, but the company did mention that SUSE Linux business has reached the break-even point. The VAR Guy wonders: Was that break-even statement about SUSE Linux an open letter from Novell to other potential suitors? Hmmm… Either way, investors are betting Novell will soon get acquired: Novell shares surged about 26 percent after the buyout offer started making news.

[...]

Either way, two things are clear: Novell received an unsolicited takeover offer. And now that the takeover offer is public news, all eyes are on the future of SUSE Linux.


The Boston press heralds:

Waltham software maker Novell Inc. received an unsolicited takeover bid of about $2 billion from a major shareholder, hedge fund Elliott Associates. Novell said its board will review the offer.


The day after we learned about some more details [1, 2] and saw the effect on the stock. This one article is also of interest:

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.


Secrecy sometimes implies misconduct. Further details [1, 2, 3] add too little, so it remains difficult to know what's going on deep inside the company and Matt Asay, a former Novell employee, only speculates. He mentions Elliott's dodgy Congo affairs that we wrote about last night.

Would Elliott sell? Almost certainly. Elliott is an investment firm more known for its trades in Congo debt markets than technology securities and is likely already scouring the market for likely homes for Novell's different divisions, with the Linux business the best of the bunch.

[...]

In sum, Novell's legacy has weighed down its ability to push its Linux business into top gear, a problem that won't afflict likely suitors for that business. These companies have largely relied on Red Hat to be a counterweight to Microsoft on the OS side. But with a healthy middleware and virtualization business, Red Hat starts to look like a credible threat to Oracle, VMware, and other erstwhile partners.

All of which positions Novell's Linux business to play a critical role in the software industry. Let the bidding begin.


In Reuters Blogs, Elliott is described as "activist hedge fund" (yes, by Reuters), which is a familiar title because of raiders like Carl Icahn who fought Microsoft's battles to take over Yahoo! (which they eventually did in a way, even cheaply).

Sean Michael Kerner believes that going private would be good for Novell.

In layman terms it basically means Novell is for sale and could be taken private by institutional stock holder/Hedge Fund Elliot Associates. In my personal opinion it's likely a good deal for Novell and its shareholders.


What if Elliott decided to take over Novell in order to just sell it? That's a possibility.

Anyway, Novell's shareholders liked the offer [1, 2, 3, 4] and the market rallied.

The Utah press names other potential bids (as quoted before, as it involves Richard Williams).

Elliott's bid could trigger more offers from companies such as Cisco Systems Inc., Hewlett-Packard Co. and Microsoft Corp., said Richard Williams, an analyst at Cross Research. Novell reported its sixth straight quarterly sales decline last week, and Chief Financial Officer Dana Russell predicted "muted" revenue in the current quarter.


Just as a reminder, Novell is a declining business. It is pointed out in IDG's coverage of this latest bid:

Novell has struggled financially, recently reporting its sixth consecutive quarterly sales decline. Revenue fell 10% during its most recent fiscal year wrapped up in October and its net losses widened. CEO Ron Hovsepian’s total compensation fell 17% to $5.7 million.


IDG also has audio coverage of this major news.

AP puts it like this:

In the latest deal, private equity firm Elliott Associates offered to buy the 91.5 percent of software maker Novell Inc. that it doesn't already own.


Market movement news incorporating Novell (NOVL) ended up as follows:



That pretty much sums up what we've found so far. It's an interesting time because the SCO lawsuit, the WordPerfect lawsuit, and many other things are at stake.




March 2, 2010 The Board of Directors Novell, Inc. 404 Wyman Street, Suite 500 Waltham, MA 02451 Attention: Richard Crandall, Chairman Attention: Ron Hovsepian, Chief Executive Officer

Dear Members of the Board of Directors:

I write to you on behalf of Elliott Associates, L.P. and Elliott International, L.P., which collectively own, or have an interest economically equivalent to, 8.5% of the common stock of Novell and are currently one of the Company’s largest stockholders. Elliott is a multi-strategy investment firm with over $16 billion in assets under management focused on employing detailed research to address complex investment situations.

Based on our detailed review of the Company’s publicly available information and our substantial knowledge of the software industry, we are pleased to submit this proposal to acquire all of the shares of common stock of Novell for a cash price of $5.75 per share. This price represents a premium of 49% over the Company’s current enterprise value and 77% over the Company’s 90-day volume-weighted average enterprise value.

As the Company’s cash balance of nearly $1.0 billion represents almost 60% of its current market capitalization, we believe that a premium to enterprise value represents the most meaningful measure of the value that our proposal offers stockholders, valuing the Company’s cash at 100 cents on the dollar despite the fact that a significant portion of that cash is overseas and may not be realized in a tax efficient manner.

Importantly, this price represents a premium of 115% over the Company’s enterprise value on January 4, 2010, the last trading day before we commenced actively acquiring Novell’s common stock. This price also represents a 37% premium to Novell’s closing stock price on January 4, 2010 and a 20% premium to Novell’s closing stock price yesterday. By any measure, we believe our proposal represents a compelling opportunity that your stockholders will find extremely attractive.

Novell is a long-established company that we have followed closely for a considerable period of time. 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.

Our proposal is subject to a confirmatory due diligence review of the Company and negotiation of definitive documentation. We are available to sign an appropriate confidentiality agreement and commence our due diligence review immediately. Elliott is prepared to devote considerable resources to completing this transaction and we are confident that, with your cooperation, we will be in a position to execute a definitive transaction agreement on an expedited basis. While we intend to work with financing sources, obtaining financing is neither a condition of our proposal nor a condition to completing the transaction.

We are prepared to meet immediately with you and your advisors in order to answer any questions about our proposal and to work out the details for moving toward a definitive transaction agreement. We also look forward to discussing with management its role with us going forward.

Of course, nothing in this letter is intended to create a legally binding obligation and no such obligation will exist unless and until a definitive transaction agreement is executed. As a result of our substantial share ownership in Novell, SEC rules oblige us to make the existence and contents of this letter public. Please feel free to contact me at (212) 506-2999 to discuss or clarify any aspect of this proposal.

On behalf of Elliott, we are very much looking forward to working closely with the talented employees of Novell to bring the Company forward to its next phase of growth.

Very truly yours,

Jesse A. Cohn

Portfolio Manager

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