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What will a buyout mean for Novell users and product support?

On March 2, Elliott Associates, a New York-based fund manager, made an unsolicited $2 billion bid to acquire Novell. On March 20, Novell said that Elliott Associates' offer was inadequate, but the company left open the opportunity to be acquired given the right deal. On May 20, the Wall Street Journal (WSJ) said that

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Novell was for sale and accepting bids. The WSJ said that as many as 20 bidders may be interested in Novell and private equity firms are expected to make the most serious bids, with technology firms such as IBM and Oracle viewed as unlikely bidders.

Now, months later, there are new Novell acquisition rumors. The New York Post, on September 15, said that Novell had reached a deal to sell itself in two parts and is three or four weeks away from signing a deal. The Post said that a strategic buyer will buy the Open Platform Solutions piece, which includes the Linux platform products (SUSE Linux Enterprise Desktop and SUSE Linux Enterprise Server). A private equity firm allegedly will pick up the rest of the company -- identity and security management (Identity Manager, SecureLogin, Sentinel, etc.); system and resource management (ZENworks and PlateSpin products); collaboration (Open Enterprise Server, GroupWise, Teaming & Conferencing, etc.); and services (professional, technical support and training).

What should Novell users consider?
There are a lot of questions here for Novell users to ponder. Who will support Novell products next year? Who will you call when you have problems and need support? Will the new owner of Identity Manager keep it competitive by implementing new features?

For example, suppose you are a Novell user (there are millions of NetWare users seats under contract) and you use SUSE Linux Enterprise Server, NetWare, Identity Manager and PlateSpin products. Suppose that Oracle acquires the identity and security management products from the private equity firm; CA acquires the systems and resource management products; and some strategic firm acquires the SUSE Linux Enterprise family of products. Now you are going to have to have contracts with at least three companies to continue using your Novell products.

Instead of the convenience of dealing with one vendor, you have to deal with at least three. This will not be new to you since you likely already use various third-party products on someone's operating system. The difference is the question of whether the vendors that acquire pieces of Novell's products from the private equity firm have the same enthusiasm that Novell had in supporting and enhancing them. They probably will not. They may encourage you to migrate as soon as possible to their own existing products because they purchased Novell's product sets just to get the Novell customer base.

If you are a Novell customer, you must decide what to do. Eventually Novell will be acquired and parts of the company sold off. There are a lot if-then statements that we could run through here, but the bottom line is that you should be looking around for alternative vendors because Novell will be sold or greatly restructured.

Which vendors are likely in the running?
Who is willing to do a deal like the New York Post suggests? Why? How can the buyers make money in the short and long term? Novell clearly has to do something because its revenue is dropping and the company has few -- if any -- products with which to generate a real revenue surge in the near term. You only need to take a look at the past several quarterly financial statements and Novell's recent product announcements to understand why selling Novell is necessary.

Novell generates revenue from basically four product lines -- Linux platform products, identity and security management, system and resource management, and collaboration -- as well as services. From the third quarter of 2009 (3Q2009) to 3Q2010, all of Novell's revenue-generating areas saw a decline in revenue except for identity and security management, which had a 5.9% increase in revenue. Linux platform products had a 7.1% drop in revenue during this time period. For Fiscal Year 2009 (FY2009), the Linux platform products had revenue of $149 million. The revenue for FY2010 is likely to be closer to $140 million given the run rate of about $35 million for the past two or three quarters.

In terms of recent products (within the last year or two), Novell has tried to take the following actions:

  • Position itself as a data center management vendor capable of managing, in an agnostic manner, physical servers and virtual servers with an integrated management tool set that includes ZENworks and PlateSpin tools.
  • Create a software appliance business with new appliance tools and SUSE Linux Enterprise Server -- there is very little revenue in the software appliance business for operating system vendors.
  • Enter the cloud computing market with Intelligent Workload Management and, more recently, with its Novell Cloud Manager.

None of these products/solutions have helped Novell turn its declining revenue around. Even the Linux products, which had relatively high growth rates after the Microsoft-Novell relationship was established in November 2006, are seeing drops in revenue (6.1% from 1Q2010 to 2Q2010) or very small growth (0.9% from 2Q2010 to 3Q2010).

Novell's problems did not begin just a year or two ago. They began in began in 1997 when its revenue began to plunge, following the ouster of Robert Frankenberg as CEO. Eric Schmidt replaced Frankenberg in 1997 and in the third quarter of 1997 Novell announced revenue losses of over $120 million. Schmidt and the company decided that it would lay off 1,000 employees. During this time, Novell still held about a 57% share of the network operating system market but was not competing in the Internet software market against Microsoft and others. Novell had introduced its first Internet product, IntranetWare, in August 1996 but failed to generate much revenue.

When the Internet became a tool for many users, Windows NT 4.0 went with the Internet's TCP/IP protocol. Novell promoted the IPX/SPX protocol in NetWare. This mistake and others around the Internet by Novell further encouraged the decline of NetWare (versus Windows NT). Schmidt believed that Novell's revenue would increase by the end of 1997. He was wrong. Schmidt left Novell after the acquisition of Cambridge Technology Partners in 2001 without ever getting Novell on a track to increase revenue or build competitive products. By this time, Windows NT had overtaken NetWare and Novell never recovered.

There are strategic companies such as HP, IBM, Intel, Red Hat and VMware that might be interested in acquiring Novell's Linux platform business. Red Hat makes the most sense to us, but it has never publicly indicated an interest. It is a stretch to see why Dell, HP or IBM would want to buy Novell's Linux business since most of their servers currently run Red Hat Enterprise Linux, and they are strong partners with Red Hat.

There is a new rumor floating around that VMware is going to acquire Novell. We would assume that this would mean that VMware would acquire only the Linux products from Novell. Why VMware? VMware's primary competition in the virtualization-cloud market comes from Microsoft and Red Hat. They both offer an operating system as part of their vertical stack. An important question if VMware acquires Novell is: What would be the fate of Microsoft's partnership with Novell in which interoperability between SUSE Linux Enterprise Server and Windows is a big piece?

Novell's Linux product business generates between $140 million and $150 million of revenue per year. How much would a strategic partner be willing to pay for the Linux business? Another big question is how much would a private equity firm pay for the rest of Novell's business? In fiscal year 2009, the Linux platform business generated $149 million in revenue; identity and security management generated $121 million; systems and resource management generated $160.8 million; collaboration generated $319 million; and services generated $104.5 million.

The revenue for fiscal year 2010 is tracking below that of fiscal year 2009 except for the identity and security management products. Collaboration revenue dropped 14% from 3Q2009 to 3Q2010 and Services dropped 15% during the same time period. These two groups generated more than 40% of Novell's fiscal year 2009 revenue. Collaboration, as noted earlier, consists of Open Enterprise Server, NetWare-related things, GroupWise, BorderManager (basically a dead product), Teaming & Conferencing, etc. With the exception of Teaming & Conferencing, these are market share-dropping products.

So how much would a private equity firm pay for a set of products and services that are generally dropping revenue? If the private equity firm decides to sell off the individual product sets to vendors such as CA, Oracle, etc., how can it make money? Novell has about $1 billion in cash equivalents and short-term investments. So let's say that Novell gets slightly more than the $2 billion that Elliott Associates offered in March -- $2.25 billion.

If we take away the $1 billion in cash and short-term investments, the strategic vendor that acquires the Linux business and the equity firm that purchases the remainder of Novell will have to come up with a total of $1.25 billion, assuming a $2.25 billion total acquisition price. What is the Linux business worth? $325 million? If so, would any private equity firm pay $900 million for the rest of Novell -- for business segments that are dropping revenue in the single- to double-digit range per year? We think that it would be difficult for a private equity firm to sell off pieces of Novell to various vendors and make a profit.

Some vendors will be interested in some parts of Novell's businesses, such as the identity and security management (possibly Oracle) and systems and resource management (possibly CA) businesses because there are opportunities for them in areas such as cloud computing. But who would want to buy the rest of the Novell business?

ABOUT THE AUTHOR: Bill Claybrook is a marketing research analyst with over 30 years of experience in the computer industry, with the last 10 years in Linux and open source. From 1999 to 2004, Bill was Research Director, Linux and Open Source, at Aberdeen Group in Boston. He resigned his competitive analyst/Linux product marketing position at Novell in June 2009 after spending over four and a half years at the company. He is now President of New River Marketing Research in Concord, Mass. He holds a Ph.D. in Computer Science.

What did you think of this feature? Write to SearchDataCenter.com's Matt Stansberry about your data center concerns at  mstansberry@techtarget.com.

This was first published in September 2010

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