Blum Partners revealed this week that, disappointed by recent Novell results, it wants big changes at the NetWare and Linux vendor.
In an unusual move, the Blum Capital Partners LP investment firm publicly revealed it was very unhappy with Novells current direction.
The San Francisco-based company published several letters to Novell CEO Jack Messman detailing its complaints and suggesting changes in its SEC (Security and Exchange Commission) Schedule 13-D.
The 13-D is a form that a company or individual must file within 10 days of obtaining more than 5 percent of a companys stock.
Earlier this year, Blum only owned 1.33 percent of Novell stock.
Then, in late August, Blum acquired enough shares to put it over the 5 percent mark.
Blum had initially outlined a new path for Novell in May and June, but Messman disagreed with Blums prescription for Novell and did not implement them.
After Novells disappointing financial results for its third fiscal quarter, which ended on July 31, 2005, and were reported on Aug. 25, Blum apparently decided to take a larger position in Novell and go public with its plans.
Blum wants Novell to make four changes in four broad areas.
In its Sept. 6 letter, Colin Lind, managing partner and Greg Jackson, partner wrote, “It is imperative that Novell must: (1) reduce costs to an appropriate level necessary to operate all of its businesses profitability; (2) divest non-core businesses; (3) become a leader in Linux and identity management through joint ventures and selective acquisitions; and (4) optimize its capital structure to maximize shareholder value.”
Specifically, Blum wants “funds for R&D, sales and marketing, and general and administrative functions” of over $225 millions to be cut in 2006.
“In addition, our $225 million estimate may prove conservative as we have identified only the obvious targets for costs savings, including the companys two corporate jets, an overstaffed R&D department, the redevelopment of legacy products such as ZENWorks and GroupWise, and the maintenance of over 400 NetWare engineers.”
Next, Blum wants to sell non-core businesses to “reduce unnecessary costs, monetize value, and redeploy funds more productively. We estimate that Novell could generate approximately $500 million of pretax cash (or equity value in spin offs) as follows: $175 million for Celerant, $150 million for ZENWorks/Tally Systems, $100 million for GroupWise, and $75 million for Cambridge Technology Partners.”
As for Linux, Blum wants to acquire or partner with other Linux-related software firms as soon as possible to help create “The Open Stack.”
This last is in line with Novells existing plans.
Blum, however, wants Novell to move more quickly in this area.
Finally, Blum finds itself confounded as to why “Novell has yet to implement a major share repurchase program of $500 million.”
According to sources, Messman has little, or no, interest in going along with Blums suggestions.
Novell employees have told eWEEK.com that in an internal memo sent out late last week, Messman told employees that while Novells financial performance must be improved, current cut-cutting efforts and positive news about Open Enterprise Server, ZENWorks, identify management programs and Novells improved traction in India and China points to a brighter future.
Analysts are mixed about how well Blums suggestions would work.
Novell is making progress in its Linux and identity management software initiatives,” said Stacey Quandt, research director for the Aberdeen Group.
“However there is an imbalance between these new initiatives and the legacy NetWare business and associated projects in research and development that may not be as relevant today.”
In addition, “Novell should consider spinning off business units that do not contribute to the core business and it should make further acquisitions in the application software market to enhance its security portfolio,” said Quandt.
Dan Kusnetzky, IDC VP of system software, is puzzled by some of Blums suggestions on divisions that should be sold off.
“Since Novells focus is managing, integrating and securing IT environments, I was rather puzzled why this analyst would suggest that Novell stop developing this technology and to sell off what they have.”
And, as for cutting back on research, Kusnetzky had this to say: “Novell has been working on a hypervisor project for at least five years. Although the base technology has changed a number of times during that period, its pretty clear that Novell now plans to host both NetWare and Linux personalities on a Linux kernel using Xen.”
This makes Kusnetzky “question why someone would suggest that the R&D that produced this type of capabilities would be expendable.”
