How Much Trouble Is Novell in?

By Steven Vaughan-Nichols  |  Posted 2005-10-24

How Much Trouble Is Novell in?

Novell has had better days.

Sources within Novell Inc. have confirmed that the company will lay off as much as 20 percent of its work force of 5,800 employees by years end.

Officially, all that Novells global PR director, Bruce Lowry, has to say is: "Novell wont comment on rumor and speculation. As we indicated on our Q3 call, we will be making some cost cutting moves. When we are prepared to make public what those are, we will."

Click here to read more about Novell layoffs.

That said, sources still indicate that the layoff announcement will happen on Oct. 31st—Halloween.

At the same time, still other sources indicate that Blum Capital Partners LP, with the support of CSFB (Credit Suisse First Boston) will try to gain more influence on Novells board.

Both investment firms believe that Novell has been under performing in the marketplace. In particular, the companies want to see Novell cut its costs, focus more on Linux, divest itself of some of divisions and buyback some of its shares so as to increase the remaining shares price.

Blum, in fact, took the unusual step of publicly announcing what specific steps it felt Novell had to take to maximize its potential. Blum, after suggesting the changes privately, went public with them after Novells disappointing third-quarter resultsin late August.

While Novell subsequently implemented some of the changes suggested by Blum, the Waltham, Mass.-based company fell far short of what Blum wanted.

For example, Novell started a share repurchase program of up to $200 million of Novell common stock in September. At the time, Jack Messman, Novells chairman and CEO said, "Our stock buyback is just one of the elements of a plan aimed at enhancing shareholder value and securing Novells future as an important provider of solutions to the IT market."

However, Blum had wanted a share repurchase program of $500 million for Novell.

So, what does all this mean for Novell?

Gordon Haff, senior analyst for research house Illuminata Inc. doesnt see a fundamental difference between what Blum and Novell wants.

"There may be less a disagreement of general direction than of speed and urgency," said Haff.

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How Much Trouble Is

Novell in?">

That said, "Blum is also correct that at least some of the businesses, such as GroupWise and Cambridge Technology Partners, arent strategic or particularly connected to (Novells) Linux and identity business."

The real problem, from where Haff sits, is that while "Novell has been building up their Linux business through partnerships and other efforts. At least some of this is proper getting in position to grow. But its indisputable that there has been little enough evidence of Novell taking SUSE to the next level since its acquisition and that has to be concerning for a major investor."

Click here to read more about Novells stock buyback.

So while Haff "certainly wouldnt write Novell off yet." He also thinks that while Novell has "a lot of opportunity, but its a fair comment that there has so far not been much visible leveraging of that opportunity to date."

The Aberdeen Groups research director for security solutions and services, Stacey Quandt, also sees Novell as a company in trouble.

"Novells current financial troubles are symptomatic of a company that has changed its product strategy to remain competitive but still lags behind market leaders," said Quandt.

"The rationale for acquiring Ximian and SuSE were designed to shift the imbalance away from declining NetWare revenue and toward a profitable Linux business." Novells resellers and partners approved of its Linux move.

But, "these acquisitions face the combined challenge of an immature Linux desktop market and being the number two enterprise Linux distribution provider in North America, and number three or four in Asia Pacific and Latin America," said Quandt.

At the same time, "the attempts to reposition the NetWare product line is akin to repositioning an oil tanker adrift on high seas. Novells Open Enterprise Server was designed to provide the benefits of Linux while maintaining support for NetWare services however customers can also redeploy NetWare applications such as eDirectory on Red Hat, other Linux distributions, and Microsoft Windows."

In short, the analysts and investors appear to be agreeing that while Novell has made the right move in moving to Linux, it hasnt followed through as well as it should in making the right business moves with Linux

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