Novell Rumored to Restructure Any Day Now

by Timothy Prickett Morgan

The rumors have been running around fast and furious that commercial Linux distributor Novell, which also still happens to be the sole seller of the proprietary and declining NetWare network operating system, will undergo a more radical restructuring any day now. The reports in various IT trade rags say that Novell could layoff anywhere from 10 to 20 percent of its 5,800-strong worldwide workforce. The announcement was expected yesterday, on Halloween, but all Novell sources would confirm with me is that there would be no announcements on October 31.

This is the official statement on the rumors. "There are all kinds of articles out today on layoffs at Novell," said the statement from Novell's public relations blog. "Novell has not made any statement regarding restructuring. The information and allegations in these articles are not based on official comment from Novell. As Jack Messman acknowledged in our Q3 earnings call, we will be making some cost reduction and efficiency moves. When the details of those moves are finalized, we will announce them. Until then, we will not be commenting on what's out there in the media."

While I would be the first one to agree with the investor and Wall Street critics that say Novell should be doing a better job of catching the Linux wave--as rival Red Hat seems to be doing--I think people have forgotten that Novell has only been at this Linux game for under two years and that, truth be told, Red Hat has not even come close to the irrational exuberance of the investment community when it went public in July 1999. Just because Linux is popular and well-respected doesn't mean that it is easy to make money at it, and it surely doesn't mean that Novell can replace dwindling NetWare sales with SUSE Linux sales. They are two completely different sets of customers, and any NetWare customer thinking of jumping is equally likely to jump to Windows as it is to Linux. Maybe more likely. No one, from Novell CEO Jack Messman on down, ever said that this transition from NetWare to Linux would be an easy one. And if the hotshot investors who bought up Novell shares were thinking it would be easier and Novell stock would rocket up and make them rich, well, maybe they bet wrong. But Novell has not bet wrong by buying SUSE and Ximian and a bunch of other open source software developers. And no matter how wounded the investment community might feel about Novell's financial and stock performance--which would have been abysmal and without hope of any kind without Linux--Novell's top brass has made no promises about how business would be for the past two years, other than to say that it was going to adopt open source technologies, be a contributor to open source communities, and be a significant player in the Linux and related open source platform technologies.

IT Jungle uses SUSE Linux Enterprise Server 8 on many of its servers, and we were an early customer of the SUSE Linux Openexchange Server for groupware software as well. And we will soon be upgrading those servers to run SLES 9 Service Pack 2. Judging by our experience with SUSE Linux, it is a great, reliable platform, and with the pricing changes Novell has made in recent months, they kept our business. Moreover, I have been dabbling in desktop Linux for three years now, and I can say that in all honesty that SUSE Linux 10.0 is the first Linux I have run on my laptops that has made me happy and actually made me think that I might have a chance to ditch Windows once and for all. To make this more clear to Wall Street types who are focusing more on quarterly results and less on Novell's products: Novell has made SUSE products better, and it is competing effectively, at least in terms of products and pricing, with Red Hat. Whatever Novell's problems are, product and pricing is not it.

Colin Lind and Greg Jackson, who are from Blum Capital Partners, have been calling for a drastic restructuring, along with a few analysts on Wall Street. You can read the main letter outlining Blum's call for action here, and you can read Novell's responses to these letters here.

Here's the main idea from the Blum letter to Messman, dated September 6: "We believe that you and the Board do not appreciate the immediacy or the magnitude of what must be accomplished for Novell to return to an appropriate level of profitability, and subsequently an attractive level of growth." So Blum outlined a plan, saying that Novell should take an axe to the 400 NetWare developers who still work at Novell, the two corporate jets, and the reworking of ZENworks and GroupWise to be modernized for Linux. Blum added that the company could generate $500 million of pretax cash (or equity value in spin offs) by getting rid of the Celerant consulting business ($175 million), of the ZENworks/Tally Systems system management software business ($150 million), of the GroupWise middleware business ($100 million), of the Cambridge Technology Partners consulting and systems integration business ($75 million). Blum says further that Novell should then institute a $500 million stock buyback program, thereby pumping up the stock. Blum also called for each Novell product line to be profitable.

Let this be an object lesson for all you readers on why you never, ever go public. The reason is, from that point forward, you can't tell people to butt out of your business, because it ain't your business any more.

In late September, Novell's management begrudgingly granted a partial concession to Blum and other critics when it announced it would spend $200 million of its $1.6 billion in cash over the next 12 months to buy back common stock on the open market. At the time, I said that what Novell ought to do is take out a giant loan, take itself private, and manage its own transition from NetWare to Linux as it saw fit. Today, Novell has a market capitalization of around $2.9 billion (up $300 million from a month ago), so it would only have to borrow $1.3 billion. If Blum is right about those assets being worth $500 million, it could be knocked down to $900 million to go private--provided Novell's stock didn't sell at a premium, which I do not think it would given the difficulties in the NetWare to Linux transition.

I don't think Novell will try to take itself private, by the way. That $900 million in cash is a lot of money, and selling those units for $500 million would not be easy. But something is up. There are too many rumors running around to believe nothing is going to happen.