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Volume 1, Number 27 -- August 3, 2004

Sun Considers Buying Novell--and a Lot of Other Companies

by Timothy Prickett Morgan

The nearly $8 billion in cash that Sun Microsystems has in the bank is burning a hole in its pocket, and according to the spokespeople at Sun, the sky may not be the limit but Sun is considering all of its options. The Sun PR team was deflecting an onslaught of inquiries after Jonathan Schwartz, Sun's president and chief operating officer, said that Sun was considering acquisitions in general and had considered acquiring Novell, which only last year bought itself into the Linux market.

Schwartz was talking to reporters from the Wall Street Journal over the weekend, and he told the Journal that Sun had been looking at a number of strategic acquisitions, including Novell. That company, which has moved its headquarters back east to Waltham, Massachusetts to suit the tastes of Jack Messman, Novell's chairman and CEO for the past two years, acquired German commercial Linux distributor SuSE last fall for $210 million. Sun has not, according to the Journal story, been in negotiations with Novell. This seems to be more of a thought experiment for Sun's top brass and a way to steal a little thunder from the Linux faithful, such as Red Hat and Novell, as the LinuxWorld trade show gets under way in Sun's own Silicon Valley backyard this week.

Noel Hartzell, a spokesperson for Schwartz, said that a Novell acquisition had definitely been tossed around as an idea, but when pressed further to find out if rival Red Hat was also on Sun's mind, he said that Sun was not going to comment further on who was and was not being considered as players in the Sun Cash Hoard Lottery.

"Sun does not comment on rumors or speculation," said the official party line from Sun PR a few hours later, "but what we can tell you is that Sun is better positioned than at any point in its 20+ year history to service the need of customers. . . Sun's strong balance sheet is a major asset that offers the company a high level of liquidity, which provides Sun with the flexibility for debt repayment, share repurchases, acquisitions, and other strategic investments." Glad we straightened out the confusion about what Sun would and would not do with its money.

Sun has $2.1 billion in cash, $1.5 billion in short-term investments, and $4 billion in long-term investments with which it can make acquisitions. The company could also issue new stock (and thereby dilute its existing stock) if it wanted to make a really big acquisition.

At the end of April, Novell had $636 million in cash and just a few weeks ago it raised another $475 million in a debt offering; the company's market capitalization is around $2.6 billion, which is about a fifth of the market cap of Sun, which is worth $13.1 billion in terms of the aggregate value of its stock and at least $20 billion when you add in the cash. Novell is arguably worth at least $3.5 billion, which is a lot of dough for Sun--which has backed away from Linux as it ramps up toward its Solaris 10 Unix variant this fall--to spend. Sun can't really afford to buy the dominant Linux player, Red Hat, either, which has a market cap of $3.1 billion and which has $230 million in cash and investments. Red Hat would probably cost at least $4 billion, a price that is too rich for Sun's pocketbook.

That said, if Sun really wanted to create trouble for rivals IBM and Hewlett-Packard, it could take the high road and buy both Novell and Red Hat to create a single Linux platform before SuSE Linux Enterprise Server and Red Hat Enterprise Linux fork (like Unix did) and become two separate operating systems. (Some, including Sun, have argued that this has already happened.) These two acquisitions would cost Sun beaucoup bucks--all of its cash, in fact--and would not necessarily leave Sun with a software and services business that could get a decent return on investment. Linux has the potential for approximately $400 million to $500 million in commercial sales in calendar 2004 across Red Hat and Novell, and even if sales of the two doubled every year, it would take Sun four and a half years to get its money back. This is not the kind of return on investment that Sun or its shareholders are looking for.

If Sun acquired Novell and/or Red Hat, Sun would really only have two options: Come clean and say that Linux is the way of the future and gouge Solaris customers until they jumped to Linux, or shut down that Linux business and peddle only Solaris.

Knowing this, what Sun will do (as opposed to what it will toss out as interesting possibilities) is to focus on making Solaris the better alternative to Linux. This is what Solaris 10 on X86 is all about. If Sun needs to do anything, it needs to spend a lot of dough trying to undermine the credibility of Linux at every opportunity. Solaris 10 for X86 can run Linux applications, and in a sense it is Linux as well as Unix. However, if no one knows that, it doesn't really matter.

Maybe Sun should buy Ogilvy & Mather?

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Editor: Timothy Prickett Morgan
Managing Editor: Shannon Pastore
Contributing Editors: Dan Burger, Joe Hertvik, Kevin Vandever,
Shannon O'Donnell, Victor Rozek, Hesh Wiener, Alex Woodie
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
Contact the Editors: To contact anyone on the IT Jungle Team
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