06.23.09

More on Novell’s Willingness to Sell

Posted in Finance, Microsoft, Novell, SLES/SLED, UNIX at 2:58 am by Dr. Roy Schestowitz

For sale

Summary: Novell is reportedly willing to sell parts of the company, but what about SUSE and UNIX?

NOVELL’S last BrainShare conference was one of Novell’s last hurrahs. As old photos remind us, Novell chose to go the dark side — so to speak — in order to buy itself some more time on the NASDAQ and perhaps in the market in general.

Novell may soon sell parts of its business [1, 2], but which ones? The one of most relevance to us is the SUSE component; as the rest is quite irrelevant to the patent deal with Microsoft, except for the units which make use of SUSE as the underlying operating system. According to yesterday’s article from Timothy at The Register, Novell’s SUSE component is still not profitable. To quote some fragments of interest from his analysis:

Commercial operating system distributor and software powerhouse wannabe Novell isn’t doing the credibility of its long-term business plan any favors by talking about selling part or all of the company to potential suitors.

[...]

This was a pretty strong signal that Novell might be up for sale, after many years of rumors about the company possibly being acquired by IBM, Microsoft, Hewlett-Packard, and others. The signal was so strong that Novell’s shares rocketed up 10.1 per cent to $4.68 a pop, giving the company a market capitalization of $1.62bn. That’s one way to get the stock price to move.

But it is apparently not what Novell intended, and somewhere between Novell HQ and JP MorganChase, some wires got crossed. Because on Friday afternoon, Novell posted an 8-K form with the U.S. Securities and Exchange Commission that put the kibosh on the talk about a sale or spinout of specific units.

[...]

Maybe. Novell’s Linux business, as it admitted when it reported its second quarter of fiscal 2009 financials at the end of May, is still not profitable, even after $238m in Microsoft SUSE Linux coupon cash has been pumped into the company’s books over the past two years. There’s another $102m that can still be pumped in as Microsoft customers activate the remaining $27m in coupons from the original $240m agreement from November 2006, plus another $75m that came from a second coupon deal the two companies inked at the end of 2008.

Without that Microsoft funny money, Novell would have had to slash costs and payroll, and would not be able to show the decent growth it has attained with its Linux business. So in that regard, it was a smart move, even if it did invoke the ire of the open source community. But depending on Microsoft to help promote Linux is not a sustainable business model.

[...]

It seems that $1bn or $1.62bn are pretty decent valuations for Novell at this point, no matter how much Novell’s top brass might protest, and it also seems very unlikely that any company would shell out the $2.5bn to $3bn in cash it would take to buy Novell, unless that company thought it could remove substantial costs from Novell above and beyond what Novell has done itself.

As someone points out in the comments, there is danger that particular parts will be “bought by Microsoft.”

cuz then MS would own the UNIX source code.

[...]

Another person remarks: “Novell may have a big chunk of cash from the MS coupons, but it isn’t clear how much business they lost by making their deal with MS.”

Novell may have rebutted the speculation that the business as a whole will be sold, but which parts of the company had negotiations going on for sale? Any at all? Here is what was inferred from a meeting with Novell’s CFO, Dana Russell:

DiFucci noted that he held meetings with Novell CFO Dana Russell yesterday. He writes that Russell “entertained the possibility of breaking out some parts or of selling the entire company in order to maximize shareholder value given the current depressed valuation levels.” DiFucci writes that, while Russell also asserted that management is making progress in unlocking some of the value of the company, the discussion about a possible break-up or sale “could signal the company’s willingness to be acquired.”

If Novell gets sold, Boycott Novell will stay. Boycott Novell has already outgrown the narrowing remit of Novell anyway.

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