What a long strange trip it has been for Novell (Nasdaq:NOVL). Once a major player (the major player) in network and enterprise operating systems, this software company saw larger rivals chew away its dominance, and management responded with a series of odd, questionable and sometimes flat-out bad acquisitions that never really seemed to work. With the company long in play, management has announced the sale of the company to a private equity group, bringing at least a temporary end to its odd journey as a public company.
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Novell announced Monday morning that the board had accepted an offer from Attachmate Corporation to sell itself for $6.10 per share in a $2.2 billion all-cash deal. Attachmate is an investment group owned by Francisco Partners, Golden Gate Capital, and Thoma Bravo and already owns other software businesses like Attachmate and NetIQ, which sell products like terminal emulation and system/security management software to the corporate market.
Attachmate's deal is a mixed blessing for Novell's shareholders. Some may remember the glory days when Novell's stock traded above $30, though the stock has struggled to break $10 for the past decade. Novell did get a buyout bid of $5.75 back in March of 2010 and the stock has been in play ever since; accordingly, the 9% premium to Friday's close may not seem all that impressive. While management pointed out that this still presents a 28% premium to the pre-deal-chatter price, that is still a mixed blessing - not bad relative performance against large software companies like IBM (NYSE:IBM), Oracle (Nasdaq:ORCL), or Microsoft (Nasdaq:MSFT), but unimpressive against more dynamic names like Red Hat (NYSE:RHT) or the cloud computing darlings like Salesforce.com (NYSE:CRM) or VMWare (NYSE:VMW).
The Best of Bad Choices
It is hard to see how Novell had a better option than selling out. Microsoft thumped the company in the 1990s, and Novell was not really making much headway with Linux against Red Heat, despite alliances with Microsoft and SAP (NYSE:SAP). More to the point, the company has been posting year-on-year revenue declines and there is scant analyst enthusiasm regarding a meaningful improvement. Perhaps the company's latest reinvention and mix of open source and proprietary software would have worked, and maybe Attachmate can do more with it ... but the future was not bright for Novell on its own.
Investors might do well to study the lessons of the Novell experience. Novell had a great business (NetWare was a great product for a long time), but Microsoft outflanked them on the marketing side of the business. In response, Novell tried to get into Microsoft's kitchen with non-core acquisitions like WordPerfect, but this effort failed and the company sold such businesses to Corel. Likewise, the acquisition of Cambridge Technology Partners may have been prescient in terms of the union of software and services, but Novell really could not do much with it, and this business spun itself out seven years later.
There are valuable lessons here. Be very suspicious of "diworsifications" that seem to be a step away from a company's core business, particularly if they attempt to copy a rival's winning formula and/or there is a history of iffy deals in the past. Also beware of companies that continue to tout their history and their technical expertise even in the face of flagging marketshare - there is an argument to be made that it took a long time for Microsoft's products to be better (and some would argue they never were) than Novell's, but Microsoft's overwhelming success made that moot.
The Bottom Line
All in all, Novell had its moment in the sun, but through a combination of poor vision, poor execution and management self-distraction through M&A, the company just could not hold on to that success. (Huge companies may not be as infallible as previously assumed. Find out why bigger isn't always better. See Conglomerates: Cash Cows Or Corporate Chaos?)
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