Legacy-Loving Attachmate Shells Out $2.2 Billion for Novell

Published: November 29, 2010

by Timothy Prickett Morgan

When the top brass at Novell hammered a For Sale sign on the piece of grass at its Waltham, Massachusetts, headquarters back in May after rejecting an unsolicited $2 billion takeover bid from private equity firm Elliott Associates in March, it was pretty clear that bits and pieces of Novell could end up hither and yon and other companies haggled over pieces of the complex software company.

Elliott Associates amassed an 8.5 percent stake in Novell before launching its bid in March, and still holds that stake today as a group of private equity firms familiar to the IBM midrange ganged up with $2.2 billion in cash to acquire Novell last Monday. Francisco Partners, Golden Gate Capital, and Thoma Bravo, who collectively own Attachmate, the host access and application modernization tool vendor, as well as NetIQ, the systems management and security tool vendor, have spent lots of money in the midrange. (Thoma Bravo also owns high availability software maker Vision Solutions, which is a conglomeration of the three largest vendors in the IBM i clustering market and now Double-Take, a Windows-based HA vendor; it also has a stake in IBM reseller Sirius Computer Systems.)

By the time WRQ, a rival maker of host access and modernization tools, was added to Attachmate and then NetIQ was brought together, the company had just under $400 million in revenues and somewhere around 40,000 customers. Attachmate is a private company these days so it doesn't provide revenue figures, but says it has 65,000 customers today, including the NetIQ customer base. NetIQ had trouble making money, but it is a fair guess that these equity firms have done a good job wringing out costs and extracting profits from the Attachmate portfolio. That's how they get the money to do the next deal, and the $1 billion in cash that Novell has, plus the cost-cutting that will no doubt be done after the three equity partners (and Elliott Associates, which is rolling over its Novell investment into an Attachmate investment) close the deal, will be used to fuel the next acquisition.

Novell was crabbing back in March that it could get a better deal for itself, and honestly, it really didn't if you analyze the figures. Elliot was offering $5.75 per share or about $2 billion, and net of the $991.3 million in cash that Novell had in the bank was really offering to pay $940 million. (It only had to buy the 91.5 percent of Novell it didn't already own.) The three equity firms behind Attachmate do not hold sizeable stakes in the Linux and NetWare distributor, which also has a decent business peddling systems management and security and access control software in addition to operating systems and a flagging GroupWise email and groupware product. They are offering $6.10 per share for Novell, which works out to $2.2 billion to acquire the software company. Novell has just over $1 billion in cash now, so that works out to just under $1.2 billion, which is considerably better than the Elliot netted-out deal of $940 million.

But here's the neat twist. As part of the deal, Attachmate is going to sell unspecified intellectual property rights to a consortium called CPTN Holdings LLC that was organized--wait for it--by Microsoft for $450 million. Yes, Ray Noorda's old nemesis when he turned Novell from nothing to a $2 billion powerhouse and Ron Hovespian's savior more than once as he has tried to keep Novell on an even keel as NetWare implodes and SUSE Linux takes time to fill in the gap. And Attachmate is therefore only paying $706.3 million for Novell when all is said and done.

Neither Novell nor Attachmate said exactly what intellectual property is so valuable to CPTN Holdings in their announcement of the deal, but in an 8-K filing with the Securities and Exchange Commission, Novell said it was selling 882 patents--including their title, existing licenses, and rights to enforce these patents--to CPTN. If the Attachmate deal is not approved by shareholders, the patent transfer is null and void. If Novell kills the merger deal with Attachmate, it has to pay Attachmate $60 million, and if Attachmate kills the deal, it has to pay Novell $120 million. The three equity partners have to come up with $425 million in equity financing and $1.09 billion in debt financing; the rest of the $2.2 billion is presumably coming out of cash on hand, but once the deal is done, Attachmate gets just under $1.5 billion back through Novell's cash and Microsoft's patent money. (Come on, who else is in this consortium? And what IP are we talking about? Inquiring minds want to know.)

Attachmate says that after the deal is done, perhaps in the first quarter of 2011, it will run the SUSE Linux business as a separate unit, just like it does its eponymous products and those of NetIQ. The remaining Novell products will be run in another unit bearing the Novell name.

It is hard to say what affect the Novell acquisition will have on the Power Systems business. SUSE Linux has not exactly taken the Power-based servers by storm, but does pretty much own the couple thousand mainframe shops that run Linux on System z mainframes. It would be very interesting to see Attachmate use SUSE Linux and the Mono .NET runtime environment to host some .NET applications natively on Power-based servers. But that is probably just my pipe dream, not Attachmate's.

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