Novell: Ready to Buy

But who's doing the buying? While the cash-flush software maker wants to make acquisitions, Novell itself could be a target

by Aaron Ricadela

Novell President and CEO Ron Hovsepian at a press conference in 2006 Monica M. Davey/AFP/Getty

Novell (NOVL), the struggling software maker once among the computer industry's best known names, is trying to reclaim relevance through an embrace of open-source software and a détente with onetime rival Microsoft (MSFT). Now, having stemmed a multiyear revenue decline and beefed up its balance sheet, Novell plans to start acquiring smaller software companies in a quest for growth.

Novell is flush with cash—$1.86 billion as of the end of its fourth quarter, about twice annual revenue. Ron Hovsepian, an IBM (IBM) veteran who took over as Novell's CEO in 2006, says he will start using that pile to buy companies. He singles out targets that specialize in the Linux operating system, data-center management software, and security software markets. "We have to generate a return to shareholders for spending their money," says Hovsepian. "These three markets are plenty for us to grow."

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Hovsepian is hoping to accelerate a turnaround now in its infancy. Sales rose 1.4%, to $932.5 million, in the fiscal year ended Oct. 31, 2007, following a 2006 decline. Operating margins were 4% in 2007, and the company expects 7% to 9% margins in fiscal 2008, on revenues of $920 million to $945 million. In January, two investment firms upgraded Novell's beleaguered stock. Jeffries & Co (JEF) on Jan. 29 rated Novell's shares a buy, citing strong cash flow, stabilizing revenue, and fatter margins. And Oppenheimer (OPY) on Jan. 29 raised its Novell rating to "outperform," citing the company's bolstered balance sheet. A broad patent and licensing deal with Microsoft, the company most responsible for Novell's long decline, has furnished the vendor with $348 million in cash and a stronger appeal to customers.

Now, Novell needs to convince Wall Street that bulking up through acquisitions is a better use of cash than buying back stock, even as larger tech vendors and private equity firms consider Novell a potential target. Novell's fate is important for another reason as well: Its value could help gauge the worth of other hard-to-value companies specializing in so-called open-source software, whose code is freely available to developers the world over.

Novell was once a power in operating systems for servers, the computers that run Web sites and networks of other computers. The company became a top supplier to corporations of the open-source Linux operating system through its 2004 acquisition of Suse. Whether it buys smaller, Linux-related companies or gets bought itself, Novell could spur investors' interest in open-source software, already piqued by Sun Microsystems' (JAVA) $1 billion acquisition of open-source database supplier MySQL on Jan. 16 (BusinessWeek.com, 1/17/08).