Novell Expected to Lay Off Up to 20 Percent

A source says the company will lay off as much as 20 percent of its work force, which would number about 1,160 people.

A highly placed source at Novell Inc. has confirmed to Ziff Davis Internet that the company will lay off as much as 20 percent of its work force of 5,800 employees by the end of the year. The announcement is expected to be made sometime this week.

On Friday, NewsForge speculated about the layoffs, reporting that 10 percent to 15 percent of Novells staff members will be let go.

But the source told Ziff Davis Internet that the layoff total will be "more" than 15 percent, which would number about 870 people.

The number will be closer to 20 percent, or about 1,160 people, the source said.

Waltham, Mass.-based Novell has lost market share in the fierce enterprise Linux market to Red Hat Inc. and IBM in recent months.

NetWare, the companys flagship enterprise networking software platform, also has been slipping in market share during the past two years.

The upheaval and demand for major corporate change have been led by Blum Capital Partners LP, an investment firm that which owns about 5 percent of the company.

Blum Capital Partners told Ziff Davis Internet in September that, disappointed by Novells results last quarter, it wants big changes at the NetWare and Linux vendor.

Apparently, about a month later, those changes are about to happen.

Blum said it had initially outlined a new path for Novell back in May and June, but whatever those plans were, Novell CEO Jack Messman disagreed and did not implement them. Why? Because Blum told Messman outright that it questions whether he and the current Novell management could execute the company strategy correctly.

The San Francisco-based company published several letters to Messman detailing its complaints and suggesting changes in its SEC (Securities and Exchange Commission) Schedule 13-D.

/zimages/2/28571.gifClick here to read more about Blums bid for changes at Novell.

Novell reported, here in PDF form, disappointing financial results for its third fiscal quarter, which ended on July 31.

The company surprised Wall Street with a whopping 90 percent drop in quarterly profits, to $2 million, and a 5 percent sales dip, to $290 million.

Thats when Blum apparently decided to take a larger position in Novell and go public with its plans.

Novells 2004 10K filing with the SEC showed sharply declining revenues.

The company said that its NetWare revenue stream continued to deteriorate, declining by a surprising $36 million in fiscal 2004.

Since then, Novell has gradually tried to reposition the NetWare product line.

The company has said on several occasions that its next generation of NetWare will give customers the opportunity to migrate to Linux and open-source solutions while "maintaining the enterprise-class functionality" to which they have become accustomed.

Messman has been quoted in the media several times as saying that it would take two years to turn the company around, and that deadline isnt up until January.

"We have a lot to fix," he said. "I said it would take two years, and were coming to the end of that."

Messman insists that the company is on solid ground. The company had plenty of cash—about $1.6 billion—available on its balance sheet at the end of the third quarter, but that revenue is mostly from lawsuits, not sales of products and services.

Novells board defends Messman. Director Richard L. Crandall said: "Jack is a strong manager. Hes the creator of this direction, and I dont know how you give him weak grades on leadership."

Novell purchased SuSE Linux of Germany in 2004 and immediately gained about 15 percent of the enterprise Linux market with the move.

However, its market share has not gained noticeably since then, and Red Hat Inc., the industry leader, has improved its own position to more than 51 percent of the market, according to IT analytical firm Netcraft.

Novells stock closed at $7.43 on Friday and has been trading in the $5 to $7 range for the last 12 months.

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Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 15 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...