Novell acquired by Attachmate: What does it mean?

3:45 pm General

Novell will be bought by a North American group called Attachmate that appears to be made up of financiers buying assets as investments. As someone who has seen one acquisition of a company by financiers up-close, and an acquisition of legacy products, where they languished as cash cows, I feel partly qualified to guess what might happen to Novell post acquisition – although I am often wrong about these things, so take all this with a pinch of salt.

The first hint is that Novell is being split into two groups – traditional Novell activities (mostly identity, security, systems & resource management) and Linux business (Suse Linux – presumably including things like Mono, the desktop group, OBS, Suse Studio and other related interesting stuff). In summary, looking at last quarter’s results (PDF link), old stuff that still generates a lot of revenue but little growth, and new & growing business, which just recently became profitable.

If you are a Dark Hand type of guy, the financier who wants a return on investment and doesn’t really care about innovation or changing the world, then your goal is to buy assets, perhaps sell a subsidiary or two to recoup some of the costs of the deal, perhaps change the management team, and keep the profitable business for a 5 year horizon before selling it on to make a profit. Your anticiated ROI for this type of deal would need to be around 8% to 10% per year.

So you sell on some patents & copyrights that you’re not really interested in (presumably with a free license to use said patents for a period of time), you split your business up into the cash cow moneymaker (Old Novell) and the new, growing business that can sell at a high valuiation relative to its earnings (Suse Linux), and you line up a buyer for the speculative Linux business. With $450M for patents and perhaps $800m for the Linux business, you get old, profitable business with limited growth potential, but with regular earnings (~$600M for the last financial year, as far as I can tell, in legacy revenues, with an operating net margin of >10%) and $300M cash on hand (after subtracting liabilities & deferred revenues from cash on hand).

Let’s do the sums, then: let’s say, for arguments sake, that Suse ends up being worth $800m (not unreasonable given annual revenues in the $300m range, with great growth prospects). This represents probably a 3x valuation of (Suse + Ximian), given that Suse was bought in 2003 for $210m – certainly not unreasonable given the growth of Suse and Linux since then, this might even be on the low side. Add in the $450m for patents, and $300m cash assets that they’re getting as part of the deal.

That means Attachmate will be getting all of Novell’s legacy business for $650m, around one year’s revenue. With an annual return of >10% per year on revenues. Presumably, there will be some cost cutting to increase that margin further, and some growth will be expected, so I’m sure that Attachmate are confident that they will find a buyer for Novell after a few years for around the same price, giving them that 50% return in around 4 or 5 years.

I’m sure that some people here more familiar with the financial markets, SEC filings and annual reports, and generally “the way things work” will point out the half-dozen flaws in my thinking here, but this is what I expect to happen – a lot of people in non-core areas will be laid off in an effort to reduce costs and “streamline” the company (ie. make it a more attractive acquisition target), Suse will be sold on, and Novell will be kept as a cash cow.

To all the friends I have working with Novell, I wish you well. Acquisitions are uncertain times, and morale sapping at the best of times. The dust will settle soon.

9 Responses

  1. Tweets that mention Safe as Milk » Blog Archive » Novell acquired by Attachmate: What does it mean? -- Topsy.com Says:

    […] This post was mentioned on Twitter by Open Trends, Paul Jakma and Zuissi, Irish LinuxUG. Irish LinuxUG said: David Neary: Novell acquired by Attachmate: What does it mean? http://dlvr.it/92gtq […]

  2. Justin Haygood Says:

    Not all acquisitions turn out bad. The company I work for (EyeWonder) was bought out by Limelight Networks in April, and they’ve been nothing but great to us. Maybe it’ll turn out the same for the Novell’ers.

  3. Jeffrey Stedfast Says:

    > So you sell on some patents & copyrights that you’re not really interested in (presumably with a free license to use said patents for a period of time)

    A seemingly little known fact is that when a company sells patents to another company, the original company remains immune to said patents. This effectively means that a patent owner can never sue any past owner of said patent.

  4. wvhillbilly Says:

    My main concern about people buying up patents and copyrights is that all too often the purchased IP ends up being used for abusive purposes, for suing everybody under the sun for infringement. Witness Oracle’s acquisition of Sun. No sooner did they have Sun’s IP than they started suing people for infringement, including people who had or thought they had licenses to use that IP.

    Also witness innumerable patent trolls using purchased and acquired patents for the same purpose.

  5. Matt Says:

    if attachmate’s intent is to pump and dump, that means that they pretty much intend for Novell to be out of business for good.

    since they will add management fees, eventually novell will end up upside down and bankrupt.

  6. regis Says:

    It would be interesting to know your though about irish economic crisis.

    Years ago, in another post, you explained that real estate bubble, low taxes and easy mortages was good for Ireland. Your irish dream seems to become a nightmare : high unemployment, high debts and real estate crash are reported daily by international websites and newspapers.

  7. Dave Neary Says:

    @regis Your memory is selective: http://blogs.gnome.org/bolsh/2006/08/31/limmobilier-en-france/ – I spoke about property prices in France, in 2006. Among the things I said were that everyone’s an expert when it comes to property, and there were a number of very pessimistic voices in France, that I didn’t understand.

    I also said that a crash happened because of a significant level of foreclosures – which is what has happened in Ireland – which will only happen if there is a significant rise in unemployment rates – which has happened in Ireland. I said that prices in France (apart from Paris) were relatively low compared to Belgium, Ireland, and Great Britain. which they were. And after a period when the market for property was very calm in Lyon (2008-09), we are now seeing >10% increases in the price of property in Lyon again this year.

    So like I say in that article, I am not an expert… but it seems to me that I’ve been more right than wrong about property prices in France. As to property prices in Ireland, I didn’t say much about them, except to say that the boom which started in 1992 was still ongoing in 2006 (which it was).

  8. Novell’s Last Week – Part IV: The Ugly Side of the AttachMSFT Game | Techrights Says:

    […] Neary from GNOME is not to excited about AttachMSFT, either. He writes: Novell will be bought by a North American group called Attachmate that appears […]

  9. regis Says:

    @dave,

    French notaries said at 31 may 2010, -4,5% in Lyon. It will be very very difficult to reach >10% at the end of the year….