Monday, March 22, 2010

Novell turns down $2B be continued

So let's see if I can summarize the Novell thing as i understand it.

a/ The offer is from a hedge fund
b/ the offer is 50% above EV
c/ the offer was turned down

c/ can be written off as a mere negotiation step. The board is rejecting the first offer on the table. What else do you expect them to do? There is nothing to see here and I would still put the odds very high on Novell is a sell.

I have met Hovsepian, the CEO. He is a decent enough guy and the last time I saw him, he was quite serious about growing the novell franchise. And what a base they had, about $1B in cash. The market value of that company has been drastically undervalued for years. It is so bad that the part together are worth less than the individual parts sold off. So a 50% hike from EV is nothing to sneer at but it is not as generous as it first may seem. By definition of a first offer.

Then there is the a/ part, namely that the offer is coming from a hedge fund. That is interesting, at least to me, from several angles. Ask yourselves why hasn't this company been taken out by now? Why a HF, why not an LBO private equity firm? Does the HF believe it can do a better job at breaking up and selling the parts? Does the HF have a long term plan?

It could go both ways... certainly if the EV is so under-appreciated, then breaking up the parts, is simple market arbitrage. HFs are notorious in arbitraging remote opportunities. Then the HF is turning a $300 profit or fee... An investment banker would make a 2% fee, the HF is going to collect 6%. This is a HF so it may be 2x leveraged... if the subsequent deals happen within the year then the return on capital would be 12%.... Fine, makes *some* sense.

If the HF is in the business of restructuring NVL and actually going for a long term play then that is interesting too. And more durable. Also the upside is much bigger imho. Novell was a public company. That constrains what it can and can't do under the tyranny of the quaterly reporting system. So fine, the company goes private, that is the whole basis of the PE industry. Behind the private curtain many good things can happen. Sell off the bad ducks, focus on OSS, go on a "small cap" (<$50M each) acquisition spree in the OSS landscape and try it again with a PR blitz... but that is just me, and I have no part of the deal, unfortunately.

Somehow, I wish I did... Whether what is in the cards for novell is a "wall street" movie ending where they get dismantled and the middle man collects the fee or whether it is to be grown again to come back roaring after what needs to be done, remains to be seen and is largely in this private equity firm hands. Part of me wishes it would be the second... we will see. In any case, I will be following the fate of this once great company with interest.


Nathalie said...

This post is actually by Marc. I moved it from my blog, where he accidentally posted.

Bill Pyne said...


Do you think the interest could be in Novell's UNIX copyrights that work their way into Linux?

Marcf said...

$2B to play a redux of SCO? I sure hope it is not that.

Bill Pyne said...

Unless they see potential for a new direction to Linux. Not much else about the offer makes sense. Novell's directory server and network stack haven't been players since the 90's.