Novell Raises $600 Million War Chest

by Timothy Prickett Morgan

Commercial Linux distributor Novell announced at the end of June that it would float $500 million of debt on the market to raise money for acquisitions and to buy back a block if its stock. The debt offering was oversubscribed, and Novell was actually able to rake in $600 million. What will Novell do with all of this money? There are some intriguing options that Novell has as it takes Linux deeper into the data center and out onto desktops.

Novell said in the initial offering that it planned to use $125 million of the debt offering--which was technically a 0.5 percent convertible senior debenture due in 2024--to acquire 15.2 million shares of its common stock on Wall Street. Buying up stock is useful for a lot of reasons: it gives Novell incentives to give employees and it props up net earnings per share figures. Debentures are a complex investment, but Novell is essentially borrowing from its future, and it is betting that either its stock will hit certain targets before the debentures are converted to common stock or that it can repay the debt (plus interest) before the holders of the debt ask for it to be converted to common stock. Novell said that it would use the remaining $475 million left over in the debt offering for general purposes, and teased that it could also fund acquisitions with the dough.

Having just paid $210 million for German Linux distributor SuSE last year, you might be wondering exactly what acquisitions Novell might have in mind. With rival Red Hat having a market capitalization of nearly $4.1 billion (compared to Novell's own $3 billion market cap), Novell is probably not thinking of buying Red Hat. But such a consolidation would be very interesting, especially considering that Red Hat and SuSE are risking creating a fork in the Linux operating system by having such considerably different Linux implementations. But a Novell-Red Hat merger is probably not in the cards.

While there are lots of companies that Novell could acquire, a smart move would be to buy Swedish database maker MySQL, which has millions of eponymous open source databases installed and which also has a variant of the Software AG Adabas database that was tweaked for Linux by Software AG and another German company you know called SAP. This variant is called MaxDB, and it has many of the features that MySQL is lacking, which is why SAP and SAG created it in the first place.

While MySQL is a private company that doesn't have to divulge financial figures, Zack Urlocker, vice president of marketing at MySQL, told me recently that the company made between $10 million and $12 million in database sales and has an installed base of about 5,000 customers. (This is distinct from the 5 million licenses of the open source variant of MySQL that are running out there today, which MySQL gave away for free.) Given that MySQL has doubled revenues in 2002 and 2003, it is reasonable to assume it will hit around $20 million to $25 million in 2004. With the roughly two-to-one multiple over annual sales that Novell paid to acquire SuSE, it stands to reason that Novell could get MySQL for around $50 million.

With Novell support and its channel partners behind it, it is not hard to imagine Novell pushing more database sales than MySQL currently does--particularly if it makes MySQL part of a StarOffice bundle, much as Microsoft has long since added its Access database to Office. MySQL is also attractive in that its main database supports some 20 different platforms; the MaxDB database is only supported on Linux, but would make a good adjunct to SuSE Linux Enterprise Server 9.

There is another interesting possibility: Levanta, which is a the remnant of the Linuxcare Linux services company that was founded in 1998 and severely curbed its ambitions as the dot-com boom and Linux bubble burst in late 2001. Linuxcare was almost acquired by commercial Linux distributor Turbolinux as the bubble was bursting, and after the market deflated, Linuxcare acquired a provisioning program called TurboCockpit from Turbolinux and eventually changed its name to Levanta.

Levanta's provisioning software was initially targeted at IBM zSeries mainframes running dozens, hundreds, or thousands of Linux partitions, but with Levanta 3.0, the company can now do provisioning on any X86 server running Linux. It is hard to say what Levanta is worth, but such provisioning would give Novell another weapon in its Linux arsenal with which to differentiate from Red Hat.

Novell is also in need of a content management system--Zope, based in Fredericksburg, Virginia, and Alkacon Software, based in Cologne, Germany--are interesting possibilities. Alkacon is the creator and maintainer of the open source OpenCMS program, while Zope is the maintainer of the open source CMS that bears its name.

If you are sensing a German thread running through all of this, that is no accident. Germans love Linux, just like they loved Unix a decade ago.