Novell falls as analysts question merger

3 min read

Novell shares shed 5 percent as analysts questioned its acquisition of Cambridge Technology Partners. Though analysts said Novell got a good deal on Cambridge shares, a Lehman Brothers analyst said the two companies could have a tough time integrating.

After two years of rumors that it would merge with various software and services firms, Cambridge Technology (Nasdaq: CATP) announced Monday evening its sale to Novell (Nasdaq: NOVL). Novell's CEO is stepping down as part of the deal.

Novell has traditionally built network-server operating systems, which connect desktop PCs to corporate networks, but the merger will shift the company into the information technology (IT) business. Cambridge is a technology services company that offers custom software development, software implementation and management consulting.

Novell is paying about $245 million or $3.88 per share, a 25 percent premium to Cambridge's closing price. But Cambridge shares were only up 40 cents, or 13 percent, to $3.50 Tuesday, and Novell's shares sunk 28 cents to $5.53 as an analyst questioned the viability of the deal.

"We are cautious about the merger for several reasons: successful mergers in the IT services industry are rare; there is no good precedent for a merger between a software company and an IT services firm; the overlap between the two firms does not appear to be significant; and Novell's guidance for 25 percent earnings per share accretion from the deal looks aggressive," wrote Lehman Brothers analyst Karl Keirstead in a report.

Keirstead cut his rating on Cambridge Technology to "market perform" from "buy" to "reflect the deal and the merger risks."

Upsides and downsides
Novell isn't exactly getting a growth engine, either. Cambridge and most of its peers have pre-announced several times as the IT services market gets roiled by market conditions. Its revenue growth has gone from 40 percent in 1998 to 3 percent in 1999, negative 7 percent in 2000, and it is expected to hit negative 16 percent in 2001. The company has said it expects the merger to be dilutive in 2001 by 7 percent to 9 percent.

What Novell does get is a big addition to its current consulting organization; the merger will add about 2,800 IT professionals focused on systems integration to Novell's current staff of 300, which is focused on systems design and implementation. Several analysts saw that as a benefit.

Goldman Sachs analyst Rick Sherlund maintained his "market perform" rating on Novell and noted that though the firm will lower numbers for the first year, the deal will add to earnings by about 25 percent in 2002.

Dresdner Kleinwort Wasserstein analyst Stephen Dube suggested investors "initiate or add to positions." He noted that Cambridge's base of over 750 clients will get greater exposure for Novell, something that should be a big boon to business.

The acquisition "may add to existing uncertainty, but should add to the longer-term attraction of the stock," he added on a more cautious note.

Safeguard Scientifics
Though the news may not have been stellar for Novell, it did have a positive impact on Safeguard Scientifics (NYSE: SFE).

Janney Montgomery Scott analyst Richard G. Jacobs noted that Safeguard, which owns 17 percent of Cambridge, or about 10.7 million shares, will get about $42 million in Novell stock as part of the deal.

"The merging of SFE's more troubled partners is a sign that the company is serious about only focusing on its more promising partner companies," wrote Jacobs, who reiterated a "buy" rating on the stock Tuesday.