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Cold Realities For Novell


In the fall of 2004, Chris Stone, then vice-chairman of Novell Inc ()., took a nine-week executive education course at Harvard Business School. Stone was considered a rising star at the software company. Several Novell insiders say they thought his Harvard stint was the final step in polishing his skills before he took over as chief executive from Jack L. Messman.

But Stone was in for rude surprise. As the course was wrapping up, he met with Messman, and the boss forced him to resign. Neither man will talk about the incident. But former Novell executives say the two had clashed several times previously over who should take credit for the company's decision to shift its focus to selling the Linux open-source operating system. Two sources close to the company say that disagreement was the primary reason for the final split.

The reverberations of that meeting are still being felt today. Earlier this year, investors privately expressed concerns about Messman's ability to retain key execs and manage operations. Then on Aug. 25, the Waltham (Mass.) company surprised Wall Street with a 90% decline in quarterly profits, to $2 million, and a 5% sales slide, to $290 million. Critics quickly went public with their concerns and began calling for change at the top. "I think ultimately fresh leadership is needed," says analyst Jason Maynard of Credit Suisse First Boston (). Blum Capital, with a 5% stake in Novell, told the company in a letter that its strategy is sound, but "the question is whether the current management and board will execute."

Change could come rapidly now. Novell insiders say the company plans to announce a major restructuring on Oct. 31 that will include layoffs of at least 20% of the 5,800-person workforce. Blum Capital is expected to wage a proxy battle for several seats on the board. The deadline for proxy measures is Oct. 27 and the entire board is up for reelection next April.

RED HOT RED HAT

Messman says he doesn't know what all the fuss is about. He told investors it would take two years to turn the company around, and that deadline isn't up until January. "It was complex," he says. "We had a lot to fix. I said it would take two years, and we're coming to the end of that." He dismisses the third-quarter miss as a one-time glitch and insists that the company is on the right track. Novell's board stands behind Messman, says director Richard L. Crandall: "Jack is a strong manager. He's the creator of this direction, and I don't know how you give him weak grades on leadership."

Messman may have the confidence of the board, but he still faces tremendous challenges. He's trying to create a new sort of company, selling a combination of traditional software and Linux software -- called open-source because it's created and shared by an army of volunteer programmers. Yet former Novell managers say he has an autocratic, top-down management style that conflicts with the collaborative spirit of Linux and the open-source movement.

Marketing is tricky, too. The mixed message about two kinds of products is hard to convey to customers and has little appeal to those who aren't already committed to older Novell products. Novell is known for its server operating system, NetWare, which has been losing ground to Microsoft's Windows and Linux. Unless Messman gets the strategy to click, Novell could resume the slow slide it was in before it picked up the Linux banner.

If Novell can't regain its footing, it could represent a major setback for Linux. The software has gained considerable traction in corporations, with nearly a 25% share of the server operating system market, according to market researcher IDC. Yet customers and the computer makers who back Linux want two strong Linux distributors. And right now Red Hat Inc. () seems to be running away with the market. It had 63% of the Linux server market share in 2004, compared with just 20% for Novell. "We don't see Novell that much," says Timothy Yeaton, Red Hat's senior vice-president of worldwide marketing.

The worry is that Red Hat will become just as dominant in Linux as Microsoft has become with its Windows operating system. That would eliminate one of the key attractions of Linux, and may make corporate customers less willing to rely on the operating system for their servers.

Even Novell's sharpest critics agree that getting into the Linux business was the right move as open-source software emerged as a strong alternative to Microsoft's. The company bought Germany's SUSE Linux, and smaller desktop Linux company, Ximian, in 2003. Linux gave Novell a new product line to sell, and it put the company in the middle of one of the fastest-growing markets in technology.

But while the strategy was laudable, Messman's execution has been less so. It took 18 months to retool Novell's 1,100-strong North American salesforce so it could sell open-source software, and the company is only now focusing overseas. Analysts and ex-employees say Messman's management style has contributed to the departure of employees vital to making the Linux strategy work. In addition to Stone, the company lost former Chief Technology Officer Alan F. Nugent and former SUSE CEO Richard Seibt, who both resigned. Nugent and Stone are widely credited for Novell's Linux strategy. Messman sharply denies this. "I'm the guy who came up with the strategy," he says. Nugent says, "Jack had to be sold on the Linux strategy a number of times."

Novell says Messman has been an inclusive, rather than a divisive, manager. "Management has become more team-oriented and collaborative under Jack's leadership," says a spokesman.

LEARNING TO LISTEN

To Nugent and other former insiders, Messman doesn't have the right stuff to run a Linux company. In April, 2003, just a few months before Novell's acquisitions, he alienated Linux developers by calling it an "immature operating system." At that point, Linux was widely used in corporations. After an outcry, Messman backpedaled with a public apology, saying Linux was capable of handling demanding computing tasks.

Messman's management of Novell's costs has been an issue too. It has a large campus in Provo, Utah, and headquarters in Waltham, Mass. There are the two corporate jets, which Messman says are necessary for flying customers to Waltham to meet with him. In contrast, Raleigh (N.C)-based Red Hat is so penny-pinching that its executives often take the subway rather than cabs when they're in Northeastern cities.

To Messman's credit, he is responding to some of the investor concerns. Novell has instituted a $200 million share buyback. And Messman agrees that the company can cut more costs and should sell off its consulting division, Celerant.

It's not too late for Messman to get the company back on track. Analysts praise Ronald W. Hovsepian, Novell's executive vice-president of worldwide field operations, who completed the salesforce makeover. He cut the number of products they were hawking from 300 to about 80. And he instituted a more aggressive sales culture. "We obviously had to change a lot of the DNA," Hovsepian says. Analysts see him as the new heir apparent to the corner office, thanks to a go-for-the-jugular style that Novell lacked in the past.

Will it be enough to shift Novell's direction? Maybe. A wild card is the support from computer makers Hewlett-Packard (), Dell and IBM. "There's a huge benefit to having two [Linux] suppliers. Customers have choice," says Scott Handy, IBM's vice-president of worldwide Linux. The three giants might push business Novell's way. With their help, Novell may yet turn into a leader again. For the sake of Linux, it better happen. For the sake of Messman, it better happen soon.

By Sarah Lacy in San Mateo, Calif.


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