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

Panel: Measuring Community Contributions (Liveblog)

Panelists:
Joe Brockmeier – OpenSUSE
Jono Bacon – Ubuntu
James Bottomley – Novell
Dan Frye – IBM
Karsten Wade – Fedora

* Don’t always associated “contribution” with “code”.
* People tend to contribute things that are of value to them – they are scratching their own itch.
* Measuring community is very new and is not an exact science. There’s still a lot to learn and we’re still making mistakes.
* Having a clear answer to “how do I get involved” is very important.
* The first mistake companies often make when they try to enter the Linux community is an attempt to push things upstream as-is and in a way that only benefit the company.
* Audience question: It seems most mainline kernel development comes from the developed world. Why isn’t more coming from India, China and other developing countries?
– Dan indicated that some IBM’ers are actually effectively contributing from BRIC countries, but admits that we can do a much better job here.
– Some of this is an infrastructure problem, which is already being worked on.
* Audience question: Is there a way to objectively measure contribution?
– Intuition is our starting point, but we’re moving toward reverse intuition.
– Fedora is using EKG – https://fedorahosted.org/ekg/
– Every project focuses on different aspects and different items are important to them.
– Measuring community started out very informally, but as we mature we’re being much more rigorous and scientific in our measurements.
– Deciding _what_ to measure can be difficult.
– Measuring for the sake of measuring is senseless. Getting data that is useful is very important.
Audience question: is anyone measuring the way people are mentoring?
– Generally yes, but it’s vastly different for each project/community.

–jeremy

Tech Vendors That May Not Survive 2009

We all know that the global economy is not doing well right now. Very few days go by without some bad news hitting the wire. This article (if it can be called an “article”… it’s more of a flash presentation) may be a signal that we’re going a bit too far though:

In the Channel Insider 2009 Market Pulse Survey, we asked solution providers which vendors they thought would go out of business or be acquired in 2009. The results may shock you. Based on their perceptions and predictions, the following are the vendors that made the going list of those that won’t be here in 2010.

The list follows:

10. VMWare
9. Symantec
8. Citrix
7. Sun
6. AMD
6. CA
5. Salesforce.com
4. McAfee
3. Checkpoint
2. NetApp
1. Novell

To be honest, I think the downside to the current economic situation is likely to be longer and deeper than many are predicting. To suggest that the companies above, however, will be gone in 11 months is in many cases ludicrous. There are a couple of them that could survive that duration on legacy contracts alone; without making a single sale. It is possible that many will get acquired, as the companies that do have cash on hand will find many bargains to be found. Acquisitions happen in all economic situations after all. When the news gets this negative it’s often a sign that a bottom may be near. I’m not convinced of that yet, but I think this quarter will give us a pretty good indication of what 2009 will bring.

–jeremy

Judge Kimball Rules on SCO v. Novell

It looks like Judge Kimball has finally issued a ruling on SCO v. Novell. From the article:

OK. I’ve read it now once through, and the big picture is this: Judge Kimball did not change anything in his August 10th order, which I was afraid might happen. He could have, had he heard anything that he didn’t know when he made that order. So, SCO breached its fiduciary duty to Novell, converted funds, and so it has to pay. That is ironic, in that this case started with SCO accusing Novell of slander of title, and asking for millions in damages. Instead it has to *pay* Novell millions.

However, Judge Kimball accepted SCO’s argument that UnixWare is the latest version of UNIX and that it was the foundation of all the other agreements, even though SYSV was also involved, or so SCO thought. He accepted SCO’s argument that if SCO was wrong about owning the copyrights, and it was, then it’s too bad for the licensees — they just got less than they thought they were paying for, and that is a matter for them to work through with SCO. So if EV1, for example, wanted its money back, or part of it, it would have to sue SCO.

I think this is an appealable issue for Novell, but I don’t know if they will bother. This was all about money, this trial, and very narrowly about whether SCO owed Novell anything from the Sun and Microsoft and SCOsource licenses. The rest was decided already on August 10th. And SCO doesn’t have much money left, if any, so I would guess that if SCO appeals, Novell will raise issues it certainly can in this new order. And it’s a bit hard to fit SCOsource into the APA, since it was just a strange and vague bird. But if SCO doesn’t — and to my mind the order seems designed to discourage it, since if they do appeal, they risk being found liable for even more money than now ordered — Novell then has to figure out if it is worth it.

For its part, SCO is attempting to spin this as somewhat positive:

In an e-mailed statement today, SCO described the ruling as “an important step in (its) ability to pursue the appeals to try to get all of (its) claims heard by a jury as soon as possible. We are pleased, however, that the court agreed that Novell is not entitled to anywhere near the more than $20 million dollars it was seeking.”

“Importantly, the court ruled that Novell has no right to any royalties from UnixWare or OpenServer sales by SCO, which is where the bulk of SCO’s revenue is earned,” SCO said in the statement. “This is also an important step forward in the capitalization and reorganization plan for SCO that will allow us to emerge from Chapter 11. We continue to disagree with the premise of this trial and believe that Novell is not owed anything, but that they have interfered with SCO’s UNIX rights.”

The company is reviewing the ruling by Judge Kimball with its attorneys and will be assessing the next steps over the coming days and weeks.

Realistically, SCO is probably going to appeal and it looks like they are attempting to go for a jury case. I’m not sure how much cash they have on hand, but it looks like because they were acting as an agent for what was always Novell money, the full amount should be given to Novell before any further creditors during bankruptcy. With the IBM ruling not handled down yet, things don’t bode well for SCO. Whether someone will pick up the carcass or they will just go away remains to be seen.

–jeremy

Red Hat: BofA Downgrades; Cites Troubles With JBoss

(via Matt) Following news that Novell may be building momentum comes news that Bank of America has downgraded RHT. As is often the case with stock analysts, more are piling on the downgrade now. From Barrons:

Red Hat (RHT) shares are lower today after Bank of America analyst Kirk Materne cut his rating on the stock to Neutral from Buy. His price target goes to $21 from $23.

Materne says the company’s fiscal third quarter ended November should be “solid,” but that its JBoss application server software “continues to have trouble gaining momentum.” He adds that there are “few catalysts on the horizon” that could add to current billings and cash flow growth estimates for the fiscal year ending in February 2008, or for that matter, FY 2009.

Meanwhile, Trip Chowdhry, of Global Equities Research, also downgraded the stock today, moving to Equal Weight. Chowdhry contends that the company’s business fundamentals are “deteriorating,” and that the JBos acquisition “is a complete failure.”

Chowdrhy also asserts that Red Hat Linux “is gradually being relegated to a position of non-criticality.” He also says Red Hat is losing momentum in the BRIC countries – Brazil, Russia, India and China – to Microsoft (MSFT) and Oracle (ORCL). And he says hardware vendors IBM and Hewlett-Packard are providing support and bug fixes for Red Hat Linux since “vendors feel Red Hat support is not enterprise class.”

Not least, he says that developer momentum is shifting away from the Open Source LAMP software stack – Linux, Apache, My SQL, PHP – and toward Microsoft’s .Net platform.

It’s true that Red Hat is having a little more difficulty than it anticipated integrating JBoss. When you acquire an Open Source company, much of what you are acquiring is the people. Many of the top JBoss people have left. The cultures were different, the sales models were different and I’d guess given the information Red Hat has now, they’d have done things a little bit differently. Hindsight is always 20/20 and I think the long term benefits for Red Hat and JBoss are still there.

Moving on to the Global Equities Research comments, I have no idea where Trip is getting his information. All other leading indicators I’ve seen indicate that Linux and Open Source are doing quite well in BRIC and other emerging markets (and in many of those markets Microsoft is either having difficulty gaining traction or is gaining traction by discounting heavily). Additionally, more and more companies are clearly choosing Linux for absolute mission critical applications. The NYSE is a recent example of this. Finally, LAMP adoption in general has been seeing very strong growth and MySQL AB still seems headed toward its IPO, despite the weakening US economy. It just goes to show that an “analyst” can say just about anything they want, typically with little to no justification or real repercussions.

–jeremy

Some Novell Momentum

It looks like Novell might be quietly building up some momentum. First came news that Office Depot is consolidating onto the SLES platform:

In its latest significant victory, Novell announced that Office Depot has elected to consolidate its server infrastructure on SUSE Linux Enterprise Server 10 Service Pack 1.

In the past, Office Depot, with offices in 43 countries, has used an eclectic collection of server operating systems. These include Solaris, Windows, IBM’s mainframe operating system z/OS, i5/OS (the newest version of IBM’s OS/400 midrange computer operating system) and several different kinds of Linux. According to Novell, moving to SLES on commodity hardware has already helped Office Depot reduce its hardware and power costs.

Now comes news that SAP is recommending Novell’s SUSE Linux as its preferred platform. Both announcements serve as good news for Novell, who may soon be announcing additional layoffs despite this growing momentum. Novell recently reported a loss, but its Linux revenue is up almost 70%. It’s clear that the Enterprise Linux market wants at least two solid vendors in play. Red Hat seemingly has one of those spots locked up. Canonical is now making an Enterprise push with Ubuntu, so if Novell wants to hold onto its current number two position it needs to take advantage of this traction. As usual, all of this should be quite good for consumers.

–jeremy

Patent Firm Acacia Loses Case Against Microsoft; More To Come?

It looks like Acacia, who recent filed a suit against Red Hat and Novell, just lost its first court battle. From a paidContent article:

The notorious patent holding company Acacia Research, which first came to light in the digital media industry for claiming broad patents in the streaming media field, has lost first of its many lawsuits to reach as far as a jury trial. In a federal court in Lufkin, Texas, the jury found that Microsoft (NSDQ: MSFT) did not infringe on an Acacia patent related to technology used to quickly power up computer, reports Marketwatch. Filed in 2006, the lawsuit sought as much as $900 million in damages from Microsoft, based on sales of its Windows XP OS. The news sent Acacia’s shares down nearly 35 percent in late Nasdaq trading.

As the story says, Acacia has distinguished itself as a particularly aggressive patent holding company, and has embraced the public spotlight that comes alongside suing high-profile companies. Earlier in the week, it announced a patent settlement with AT&T.

Let’s hope this is the first of the many cases they are trolling that end up with a loss. With the stock already plunging 35% on this one loss, a couple losses strung in a row could put significant pressure on the company to get a new revenue model. If patent trolls didn’t make money there would be significantly fewer of them.

–jeremy

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