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Novell to acquire SuSE Linux

Novell said it plans to acquire SuSE Linux, the second largest open source server software provider, in a $210 million cash deal.

Novell Inc. announced this morning that it plans to acquire SuSE Linux AG in a $210 million cash deal, subject to regulatory approval. If all goes as planned, the transaction should close by January 2004.

The acquisition of the Linux server software provider would strengthen Provo, Utah-based Novell in its ongoing battle with rival Microsoft and place it in direct competition with Red Hat, the top player in the open source server software space.

Reducing the barriers of Linux adoption in the enterprise is Novell's goal, according to Jack Messman, chairman and CEO of Novell, during a press conference this morning.

Microsoft vs. Novell, round two?

Some are suggesting this acquisition could reignite an old battle between the two companies. Novell owned a competiting network operating system for file and print services, which lost market share to Windows in the mid-1990s. It's a blow Novell has struggled to recover from.

Certainly, what's good for Linux is bad for Microsoft, and if Novell does a good job managing the acquisition, it will make Linux stronger because the result will be two strong enterprise Linux competitors -- Red Hat and the newly tooled Novell.

"For most IT executives in shops that are primarily dominated by Microsoft Windows, and you like Microsoft, this merger won't change anything," said Gordon Haff, a senior analyst at Illuminata, a Nashua, N.H., consulting firm. "But if you're a Microsoft shop and you are considering some Linux, this is a further indicator to you that Linux in the enterprise is very real."

The acquisition will be good for Novell, because it will help strengthen its position in the Linux market and help revitalize Novell as a company, said Steve Kleynhans, a vice president at the Meta Group, a Stamford, Conn., research company.

And Novell is saying that Linux will benefit by gaining access to Novell's wide distribution channel and entry to a great many enterprises. If Novell can combine the two companies successfully, it will make Linux stronger.

Still, experts caution that Novell has a bad track record when it comes to mergers and acquisitions. "Certainly it's a different company than back in the day of Word Perfect and Unix," Haff said.

There is a risk that Novell won't come up with a positive business formula once it pulls both companies together. "It all looks good on paper, but there is a chance [Novell] can't get a product that everyone can get excited about, and one that makes a good business model," Haff said.

--Margie Semilof, Senior News Writer

"Linux no longer has to stay in the periphery," he said. "It can come into the core of the business. We think we can make significant strides in accelerating the success of Linux adoption in the U.S. and elsewhere."

Messman touted the planned acquisition of SuSE as one that would expand Novell's ability to provide services and support on Linux. He added that Novell's acquisition in August of Ximian, a desktop management software provider, allows it to promote Linux desktops and enable Microsoft .NET applications to run on Linux, he said.

The agreement, Messman said, will allow Novell to deliver Linux and all its components -- from the server to the desktop -- and give organizations a secure, reliable and mature Linux foundation.

"This is not about competing with Microsoft," Messman said. "The objective is to reduce the impediment of Linux in the enterprise. We now believe we have the pieces in place to do that."

Also today, Novell announced that top Linux booster IBM intends to make a $50 million investment in Novell convertible preferred stock. In addition, Novell and IBM are negotiating extensions to the current commercial agreements between IBM and SuSE for continued product and marketing support of SuSE Linux on IBM's eServer and middleware products.

"We believe this is an important event in the history of the Linux marketplace," Messman said. "IBM and Novell intend to be very aggressive in pursuing it. IBM is showing how important it is with this investment."

Ted Schadler, an analyst with Cambridge, Mass.-based Forrester Research, said that the relationship that IBM will now have with Novell will be an interesting one, one that could be quite powerful and possibly damaging to a number of its competitors.

"These guys compete and cooperate all the time. Novell and IBM have a long history, and this will only strengthen the bond," Schadler said.

Schadler suggested that a possible outcome from today's announcement would be that IBM would buy Novell. Although he admitted the idea was "crazy," he said that Novell has all the assets IBM "would find attractive."

Today's announcement bodes well for the Nuremberg, Germany-based SuSE, which has not been profitable and has relied on private funding. Meanwhile, competitor Red Hat is the only Linux company that has managed to get to a state of self-sufficiency, said Al Gillen, an analyst with International Data Corp., Framingham, Mass.

"You have to look at the context, and that is Novell is moving aggressively into this space because the Linux kernel is the kernel that Novell will ride on top of in the future," Gillen said.

Gillen said that the SuSE Linux brand will enjoy better access to the enterprise market through Novell's distribution channels and its presence in large accounts.

Novell's fortunes have fallen since the mid-1990s, when it dominated the network operating system market in the enterprise, but the company is still a strong presence and unlikely to run out of money or stop selling Linux, Gillen said.

Microsoft will certainly see the acquisition as a competitive threat, but the impact won't be felt for some time, Gillen said. It will be at least six months before the fallout becomes clear, he said.

Forrester's Schadler added that, regardless of what Novell says publicly, the company is going for Microsoft's jugular. Novell is losing customers to Microsoft, and this move is a way to help preserve its installed base. With the addition of SuSE, it will have "a pretty comprehensive desktop alternative," he said.

Today's announcement could also prove a positive one for IBM in its battle against SCO Group. SCO has filed a $3 billion lawsuit again Big Blue, alleging it illegally contributed SCO Unix code to Linux -- a claim IBM denies. SCO has also threatened to sue companies that deploy Linux unless they pay a license fee for SCO's Unix product.

Messman shrugged off the idea of the litigation's causing possible conflicts.

"Today's announcement is additional evidence that we're moving forward despite SCO's claims," Messman said.

Schadler added that that this acquisition consolidates the players who have a beef against SCO. "It's now a longer list of players that SCO has to worry to about," he said.


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