Novell: Big Spender?

Company's acquisition strategy meets with skepticism.

Novell Inc., often the subject of acquisition rumors, has itself embarked on a new and aggressive acquisition strategy, which it says will strengthen its existing product line and bolster its budding yet confusing One Net strategy.

The move is only the latest attempt by the beleaguered networking company to gain some semblance of traction in an industry that has moved from proprietary platforms to open standards. And as larger problems loom, such as a stagnant stock price, a confusing Internet strategy, management of dusty 2-year-old products and a moving ASP (application service provider) initiative, many question whether customers will buy into the new acquisition vision.

"Their acquisition horror stories go back for years," said Neil MacDonald, director of research at Gartner Group Inc., in Stamford, Conn. "Within the last two years, they bought Poet, Just On and Ukiah, and theyve shut down [the latter] two of those," MacDonald said.

The strategy, said some observers, could also distract Novell as it struggles to mesh products and services with its often-confused One Net marketing message.

John Kretz, president of Enlightened Point Consulting Group, in Phoenix, who uses and tests Novell products, said the companys greatest challenge is to persuade customers that it is committed to, and can deliver on, One Net. So far, Kretz said, it has failed to do that.

One Net, according to Novell, is a way of using Novell and other third-party software products to link companies networks and enterprises around the Internet and across various platforms.

But if Novell is concerned about such distractions, CEO Eric Schmidt isnt letting on. In an interview with eWeek last week at the companys headquarters here, Schmidt said Novell has about $700 million in cash and wants to capitalize on the far-more-favorable acquisition environment following the significant slowdown in the high-tech industry over the past year.

"This is the mother of all buying opportunities," Schmidt said.

The acquisition team, which is headed by Chief Technology Officer Carl Ledbetter and which was decided upon only 10 days ago at a Friday afternoon board meeting, met for the first time last Wednesday.

"We will be looking to buy companies that strengthen our existing product line and complement our One Net vision," Schmidt said. "The primary areas of focus will be those companies in the firewall, authentication, directory and caching services industries." Schmidt said rumors of Novell being acquired are false.

In a separate interview, Ledbetter said the acquisitions are designed to bring the company closer to meeting its One Net goal by enabling it to move customers enterprises onto the Internet.

But changing Novells overall market perception as an Internet company requires more than just the right products.

"NetWare 5.1 has a Web server, [Domain Name System], [Lightweight Directory Access Protocol] integration, [Dynamic Host Configuration Protocol]—all the Internet stuff is there. But the perception is that its a legacy file and print product," said Novell user Joe Acquisto, LAN administrator at State University of New York at New Paltz. "Their marketing needs some work."

Ledbetter said that other acquisition opportunities Novell is pursuing include extensions to its ZENworks desktop and server management software, which generated $35 million in revenue in Novells fiscal fourth quarter and is expected to generate $100 million more in incremental revenue this year.

Ledbetter and Schmidt did not, however, rule out the possibility of a single, large acquisition by Novell, saying the boards charter allows for such a move.

Nevertheless, at least one person said Novell should be looking to offload divisions, not acquire them. Enlightened Points Kretz said Novell still has to dissociate itself from the perception that its business still revolves around NetWare, which will be no easy task.

While Schmidt confirmed Novell was continuing to investigate the viability of "spinning off" Novells Net Content Delivery group, he said no final decision had been made. Schmidt, however, insisted that by "spinning off," he means that the company would find a partner or accept outside investment in the division. Contrary to published reports, he said he is not interested in selling the group in its entirety.

Also not on the spinoff docket is an ASP division, according to Schmidt. Instead, the company is actively investigating ASP opportunities through a newly formed internal group known as Oliko. The 20- to 30-member team is charged with garnering industry feedback on the ASP market and identifying product opportunities.

As the acquisition strategy shifts into high gear, Novell is polishing several of its hidden gems.

Later this year it will add to ZENworks support for managing Linux and Solaris platforms and extend the software to personal digital assistants.

Due next quarter is GroupWise 6, which will allow a single server to support a larger number of clients. In the third quarter, Novell will release NetWare 6, which will offer the ability to access data storage from outside a firewall.

Products aside, whether the One Net vision and the planned acquisitions will put Novell back on a growth track remains to be seen.

"To get Novell out of the slow-death spiral, you need something to dramatically halt it," said Frank Dzubeck, president of Communications Network Architects Inc., in Washington. "To do that, you need a dramatic shift in revenue. None of this is stopping the downward spiral yet."