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Wednesday, March 3, 2010

Thoughts about Novell

There's a little M&A activity to report in the news, and I'm not talking about Music and Art.

Yesterday after the stock market ended its session, a NY-based hedge fund firm called Elliott Associates offered to buy out the software and networking company Novell for an even $2 billion dollars. It was an unsolicited bid (aka hostile takeover).

The hedge fund's modus operandi is to take "an activist approach to investing, frequently amassing significant but minority stakes in distressed or under performing companies and attempting to foment change."

Elliott Associates (and its' parent Elliott International) manage more than $16 billion of capital for large institutional investors and wealthy individuals. They clearly see an opportunity and bargain in Novell.

In after-hours trading Elliott offered to pay $5.75 a share in cash for Novell stock. That's 21 percent higher than Novell’s price at close yesterday. Predictably, there was a upward tick in Novell’s share price: it rose $1.23, or nearly 26 percent, to $5.98 in after-hours trading.

Elliott Associates - an investment firm that specializes in "distressed companies" -currently holds more than eight percent of Novell’s stock. It is offering an additional 1.8 billion to take over the company from stock holders.

Novell’s Board of Directors received a letter from Elliott Associates explaining the rationale for the firm’s bid:

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. With over 33 years of experience in investing in public and private companies and an extensive track record of successfully structuring and executing acquisitions in the technology space, we believe that Elliott is uniquely situated to deliver maximum value to the company’s stockholders on an expedited basis.

While I do not own any Novell stock personally, I have worked with their products over a period that spans decades, and am quite familiar with the company history. Their corporate HQ is actually nearby in Waltham, MA. I've been to the tech giant's "Brain Share" conference in Salt Lake City numerous times, and know or have worked with scores of folks associated with the company.

I'd be sorry to see Novell bought and cannibalized for it's remaining cash, trademarks, patents, and software inventory (such as SUSE Linux). In this ailing economy, the vultures are having a field day.

There is some truth that Novell has made famous and grandiose mistakes in strategy and marketing over the years, but their technology has for the most part been innovative, ahead of the curve, and rock solid.

I was very hopeful when ex-Sun Microsystems CTO Eric Schmidt took over as Novell's CEO in 1997. Schmidt had a clear understanding of the importance of the Internet and how cloud computing would eventually dominate the industry. At Sun he led its Java development efforts.

I recell being invited to a top-level executive briefing with Eric Schmidt at Novell's office in Wellseley, MA. Schmidt wanted to hear first-hand from Novell's customer base. The international company I worked for at the time (Zurich Scudder Kemper Investments) was a significant corporate client.

The meeting was informative and pleasant. Schmidt had just flown into town on Novell's corporate jet. I recall that he parked his plane at Hansom Field in Bedf0rd, preferring it over Logan International. Schmidt spoke to the small group about Novell's initiatives, listened to our ideas and concerns, and met with us individually. Customers were provided with lunch, and I received a nice leather notebook case and cool ball-point pen with the Novell logo inscribed on it. The future looked rosy.

In 2001 things changed. A local IT consulting company that was heavily invested in Microsoft technology - and who's core business was outsourcing software development - was "acquired" by Novell. It was called Cambridge Technology Partners (CTP), and their offices were in a renovated brick factory building along Memorial Drive in Cambridge across the Charles River from BU. The street talk at the time was that the merger was a good idea, since Novell would benefit from the additional talent of CTP's programming staff. In reality, CTP assumed the upper edge, took over Novell's management team, robbed it of cash, and led the company down a confused and ultimately dire path.

Schmidt left Novell soon after the acquisition of CTP. The rumor was that he found managing the new Novell quite difficult. The remaining senior management of the company was still entrenched in their old business models, and a myriad of complications had been introduced by the merger with CTP. Lingering complications from Novell's prior mergers (such as WordPerfect) contributed to the dysfunction. The magnitude of the organizational turmoil set Novell firmly into a state of classic management gridlock - and for an IT company that is a bad state to be in.

Around this time Google founders Larry Page and Sergy Brin met secretly with Schmidt. They realized that they had a lot in common (such as flying airplanes). The trio hit if off in a way that only geeky software engineers can do, and Schmidt agreed to assist the dynamic duo in transforming Google into a real company. The rest is history.

Novell's loss was Google's gain.

I still have my spiffy black leather Novell executive case and pen. I retain my obscure Novell certifications of CNE and Master CNE. But although Novell's customers still exist, they are much harder to find. I know that from looking at the employment pages.

All of this technology (and the companies that created them) appear to be dissipating into the proverbial "cloud."