Marrying for Money?

Novell exchanges wedding vows, but Wall Street isn't throwing rice.

Fancy white limousines started showing up in Novells parking lot about two weeks ago, but only a handful of insiders knew the company was about to marry Cambridge Technology Partners (CTP).

Secreted behind closed doors, top executives were discussing the terms and conditions of Novells proposed $240 million takeover of CTP. Given the troubled state of both companies, the talks were all business. CTP, like many consulting companies, is struggling to generate profits. Novell, meanwhile, has been struggling to push beyond NetWare, but with a $655 million war chest, this marriage could prove very interesting.

"If Novell were a cat with nine lives, theyd be on their eighth right now," says Richard Dym, VP of marketing at Sitesmith. "I think Novell took a long look at the market, which has seen big changes, and decided this was their last chance."

The Honeymooners With CTP on its arm, Novell hopes to emulate companies like Oracle, which generates more than 60 percent of its revenue from consulting services. Roughly 5 percent of Novells revenue currently comes from consulting. The CTP deal will pump that figure closer to 30 percent.

But unlike Oracle—which very often competes with its allies—Novell intends to include partners in its business dealings wherever possible .

"The best way to screw this whole thing up is to tell our partners we dont need them anymore because were going to do everything through CTP," says Novell chairman Eric Schmidt. "All consulting companies are not the same. We have to determine what solutions Deloitte & Touche offers, for example, and figure out whether they compete with CTP. That process is under way."

At first glance, the CTP/Novell deal is an awkward combination of a West Coast software company and an East Coast consulting firm. But take a closer look and youll spot several potential synergies. CTP CEO Jack Messman founded Novell in the early 1980s. He also hired former chairman and CEO Ray Noorda, who built Novell into a network software giant more than a decade ago. Moreover, venture capital firm Safeguard Scientifics funded both companies, which means they were cut from similar cloths.

Who Wears the Pants? Under terms of the deal, Schmidt will be chairman and chief strategist at Novell, while Messman takes on the role of CEO. Its a similar arrangement to the one Bill Gates has with Steve Ballmer at Microsoft.

One Novell insider says Messmans reputation is a "bottom-line guy." He says that will be a healthy change at Novell. "The nonperformers will probably exit shortly," the source says.

Schmidts new responsibilities, meanwhile, are hardly surprising. Schmidt turned over day-to-day operations to COO Stewart Nelson and CFO Dennis Raney several months ago. Still, the CTP deal was his call. "It was my decision," says Schmidt. "We had been looking at doing this merger for about six months, and we looked at as many options as you can imagine."

Says Schmidt: "The first week of February, I flew to Boston to talk to Jack. I told him, As a shareholder, I want you to run this company so I can work on strategy and evangelism. If you look at a merger of this scale, its both business and tactical. I know [Messman]. Hes better at it than I am."

Messman has faced plenty of challenges at CTP. The company pioneered much of the IT consulting markets fixed-time/fixed-pricing model. But CTP began a downward slide in 1999, when the Y2K consulting pool didnt meet expectations and then dried up entirely. The company also was late to the e-services market. CTP last year pushed out company founder Jim Sims, who now heads Gen3 Partners, a consulting firm.

Other CTP graduates include Jerry Greenberg and Stuart Moore, co-CEOs of Sapient; Malcolm Frank, CEO of NerveWire; and Bill Dolan, managing officer at Adjoined Technologies. Those and other executive departures likely contributed to CTPs recent challenges. The company cut 280 positions in January and is struggling to regain profitability.

Skip the Reception Looking forward, theres no guarantee that CTPs customers will want Novells software. NetWare sales have been anemic in recent quarters, due to the rise of Linux and Windows 2000. The recent economic slowdown certainly wont help matters.

Novell has managed to cut costs through layoffs, but Schmidt concedes that the company needs to grow its top-line revenue and its quarterly earnings. The company stock trades for about $5, but its P/E is more than 100.

Exit, Stage Left If Novells software sales continue to deteriorate, sources say the company could wind up resembling Banyan Systems. Banyan, now known as ePresence, was a server software specialist in the early 1990s, but the company fell on hard times in the mid-1990s. EPresence ultimately exited the software arena to focus on services.

"The CTP deal gives Novell a similar exit strategy, if needed," says one former Novell executive. "If NetWare sales continue to fall, Novell can go into maintenance mode on its own software and start servicing more complicated installations that involve CRM or supply-chain management."

Meanwhile, the CTP deal caught Novell insiders by surprise. "This came out of left field," says one Novell insider. "But we should have guessed something was up. There have been a lot of white limos showing up outside our doors over the past week."

The list of potential acquisitions, the source says, included a number of large consulting firms and Web integrators. "Our one Net vision has not resonated as well as we would have liked," the source says. "So we said we will grow our consulting piece to make that happen."

Big Red Flags The merger plan, however, doesnt impress Wall Street. In recent years, neither Novell nor CTP has managed to compete effectively in its core market. Plus, Novells M&A track record is downright weak. Ill-advised acquisitions like Digital Research (maker of DR-DOS), Unix System Laboratories and WordPerfect nearly destroyed the company in the mid-1990s.

In Novells defense, all of those deals happened under former CEO Noorda, who tried—and failed—to topple Microsoft.

Novells investment record under Schmidt is limited, but not very impressive. Some recent deals—like Novells $100 million stock investment in consulting firm Whittman-Hart—have gone sour. Whittman-Hart shares have fallen more than 90 percent since the company merged with USWeb/CKS last year to form MarchFirst (see story, opposite page).

"I begged our CFO not to do the Whittman-Hart deal," says a former senior manager from Novell. "Looking back, Im sure Novell would never have done that deal today."

The CTP deal comes four years after Schmidt left Sun Microsystems to run Novell. Schmidt did manage to improve Novells operating results in mid-1999, but the improvements were temporary. NetWare 5.0 arrived with great fanfare in 1998, and Novell aggressively pushed its directory service onto Windows NT and Linux. But few customers were willing to pay for a directory service. Now, its up to CTPs consultants to bring back the romance between Novell and its customers.

Ed Sperling, Joseph C. Panettieri, Jerry Rosa and Mark Mehler contributed to this article.