Novell acquired by Attachmate: What does it mean?November 23, 2010 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.