Novell Gets $2 Billion Takeover Offer From Elliott

From BusinessWeek:

Novell Inc., a seller of network software whose stock has slid 85 percent in the past decade, received an unsolicited takeover bid from shareholder Elliott Associates LP that values the company at about $2 billion.

Novell’s shares jumped as much as 37 percent to $6.51 in extended trading, indicating that investors see the $5.75-a- share bid as too low. Elliott, a money management firm that owns about 8.5 percent of Novell’s shares outstanding, made the cash offer public in a letter today to the company’s board.

So who exactly is Elliott Associates LP and what are their intentions? From a post by Brian Proffitt at IT World:

Today’s news is different. Those past flirtations with Novell from Oracle and Sun were just that–flirtations. The offer from Elliott is real and potentially very dangerous.

The stock market reaction to the offer was predictable: Novell’s stock surged 27 percent right after the news broke, and it should stay strong for a while until the market figures out if this is a Good Thing.

The Linux community hasn’t raised a big fuss, though I suspect they’re still absorbing the news. I know I am, for my part. In particular, I am wondering what will happen to Novell if they accept this unsolicited bid?

A key passage in Elliott’s letter-slash-press release give some clues:

“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.”

First, let’s make sure that the “underperformed” label stays firmly in our minds. Whether you buy that or not about Novell, that’s the perception Elliott has, and it will drive the entire strategic vision Elliott will have to “fix” Novell if they do acquire the company. Typically when a group of investors comes in with that kind of attitude, they either think the target company is being wasteful (in which case, watch out for sharp cost-cutting measures, like layoffs) or is going in the wrong direction.

It seems Elliott (again, publicly) believes the latter. “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,” is very interesting because it’s probably a not-too-subtle hint that Novell’s shift towards Linux has detracted from its “legacy” NetWare business. Where, apparently, Elliott believes there is real value.

Which begs the question, is Elliott crazy or faking us out?

There are some conspiracy theorists that the Elliott hedge funds involved in this purchase request are just a front for Microsoft, Canopy, or [insert antagonist here] in a bid to kill SUSE and the rest of Novell’s Linux product line dead. While this is certainly possible, given that like most private hedge funds, Elliott’s participants are locked up tighter than the script for the series finale of Lost, I am thinking no–Elliott is not going to kill off Novell or its Linux business on behalf of anyone else.

I suspect Elliott may kill Novell based on its own motives.

Why? A few searches on the Internet reveal a pattern for Elliott investments/acquisitions. Founded by Paul Singer, Elliott tends to specialize in distressed companies as investments–or nations. Elliott purchased $31 million in the Congo Republic’s debt a few years back and when the Congo didn’t–or couldn’t–pay, Elliott sued the nation for $100 million in principal, interest, and penalties. In 2008, the suits were settled, after at least $39 million had already been collected.

It’s a pattern of behavior for Elliott: in 1996 Elliott plunked down $11 million for discounted Peruvian debt and sued the country for $58 million. Ultimately, they got the $58 million. This is why Elliott is well-known in financial circles as a vulture fund.

This kind of distressed debt investment is something Elliott likes to do, even in the private sector. The hedge fund had enough invested in WorldCom to served on the beleaguered firm’s creditors’ committee during WorldCom’s bankruptcy. They like to come in and pick up bargains from dying or distressed organizations.

Clearly, these Elliott folks are no pushovers. Nor do I think they are crazy or inept enough to think they can redirect Novell towards a NetWare future, so I think yesterday’s offer letter is a bit of a feint. Elliott does see some sort of value in Novell–but likely not in its present form.

I believe it’s something in Novell’s patent portfolio or intellectual property that Elliott wants. Something like the UNIX rights, for instance. Whatever they want, I don’t believe Novell will survive the vivisection that could occur if the acquisition goes through.

I’d agree that’s it’s extremely unlikely that this is a shadowy conspiracy by the likes of Canopy or Microsoft, especially given the research Brian has done on Elliott. Whether they’re interested in breaking Novell into pieces or simply after Novell’s patent portfolio or intellectual property remains to be seen at this point. Either way I don’t see the acquisition being good for Novell or Open Source though. Which brings the next question. Is another suitor likely to jump in at this point. the Var Guy lists IBM, Hewlett-Packard, Microsoft, Oracle, SAP and Computer Associates as potential options. I’d add Cisco as another potential Dark Horse candidate, but agree that IBM and HP are exceedingly unlikely. The realty is that Novell is going to be difficult to digest from a strategic standpoint. They have at least four divergent businesses and Linux only makes up about 20% of the company’s revenue. That means a private-equity firm taking the company private and restructuring may be the most viable option at this point.

As of this posting, NASDAQ:NOVL is at $6.03 a share (above the $5.75 offer) which means The Street still thinks there’s more to play out in this story. We’ll be watching as it does.

(Updated)
Additional Reading: Andy Updegrove Elliott Associates and Novell: All About a Game of Cat and Mouse

–jeremy

Financial Post(s)

While the financial industry is something I’ve become more interested in lately, it’s not something you’ll see me post much about here. I will on occasion make a post, however, and this is the first such post. Don’t worry, this blog will remain 99% dedicated to LQ, Linux and Open Source and my foray into financials should give me additional insight into the viability of Open Source business models and a new perspective on some things.

It’s no secret that the economy is in horrific shape right now. I continue to think most of the damage control is focused in the wrong areas though and The real cause of the financial crisis, and the real solution hits the nail right on the head. You should read the entire post, but here’s the conclusion:

The mathematics of probability that govern the trade-offs of risk and reward are fundamentally counter-intuitive.

When investors see a fund manager generate a higher return than his competitors, they will move their money into that fund and out of the other ones. And money managers are rewarded based on the size of their fund, or the level of returns. The managers do not risk their own money. If they can provide a bigger gain for a few years, they win everything. They might even be lucky enough to be retired by the time their investors are paying the piper. The managers who have the discipline to understand and avoid the Martingale tricks will not be able to compete on the basis of their returns over a few years, and will eventually lose their funds and their jobs.

But many people managing large funds are men and women of integrity. They will not willingly expose their investors to total loss in order to line their own pockets with cash. Yet the system as it presently works does not allow them to compete without some kind of trade-off of long term risk versus short term reward. The solution that they usually flock to is to create such a complex Martingale system that they themselves cannot understand the longer term risk implications. As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

In the 80’s the emerging Martingales were called junk bonds and LBO’s. In more recent times they are known as mortgage backed securities and credit default swaps. You can regulate mortgages half to death and try to control what kind of risks various kinds of investment organizations are legally allowed to take. You can even forbid short selling and ban golden parachutes. But as long as managers are paid a percentage for managing other people’s money, they will compete with each other based on the returns they appear to generate. The pressure to create out-sized returns will eventually force them to invent the latest complex scheme which will have the same effect: eventually the investors lose it all. Complex financial structures will once again emerge that even the best professional investors cannot fully understand. People will always move their money into the places that give the best return over a few years, no matter how many times they are warned with the disclaimer that “past performance is no indication of future returns.” And eventually the crisis that results will reach global dimensions beyond the means of a government bailout, especially if part of the risk managing strategy becomes counting on bailouts happening every decade or so.

The only solution is to forbid money management as we know it.

That fact that we’re not only ignoring this root issue, but putting many of the people that helped caused the problem in charge of fixing problem is quite vexing.

Next is By the Numbers – How 2008 Shakes Out. The post is filled with data, but suffice it to say things don’t shake out well. A couple snippets::

-33.84% The percentage loss in the Dow industrials, worst since 1931, third-worst in history.
-38.49% The percentage loss in the S&P 500, worst since 1937.
-40.54% The percentage loss for the Nasdaq Composite Index, worst in history.
126 The number of up days on the S&P 500 in 2008.
126 The number of down days on the S&P 500 in 2008. (The difference, of course, is that on the down days, the market lost an average of a kajillion points.)
28 The number of Dow industrials components ending lower on the year. The outliers were Wal-Mart Stores and McDonald’s.
15 The number of Standard & Poor’s 500-stock index members that ended the year in positive territory. This is the worst breadth for the S&P going back to 1980; second-worst was 2002, when 131 stocks, or 26% of the issues, rose on the year.
18 The number of daily 5%+ moves on the S&P 500 in 2008.
17 The number of 5%+ moves on the S&P 500 between 1956 and 2007.
6 The number of days in 2008 that rank among the Dow’s top 20 up days and top 20 down days in terms of percentage change. (The leader, with 10 appearances, is 1932.)
-17.7%.The performance of the S&P’s consumer staples sector — the best performer among the S&P’s 10 industry sectors.

Yikes! Lastly, while things are getting tough (and are going to get tougher IMHO). It’s clear that solid companies/people and ideas will still get funded, even in this economic climate. On that note, congratulations to Evan on securing funding for identi.ca. Evan is a great guy and identi.ca has a ton of potential.

–jeremy

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