Novell shareholder urges company spinoffs, cuts

Blum Capital voices concerns about the software company's performance and calls for a greater focus on Linux.

Stephen Shankland
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Blum Capital Partners, a major Novell shareholder that owns more than 5 percent of its stock, has urged the software company to dramatically cut expenses, emphasize Linux more and sell several divisions.

In a letter sent to Novell last week, Blum managing partner Colin Lind and partner Greg Jackson reiterated concerns they initially voiced in June about the software company's performance. The two sent the recent letter after a Credit Suisse First Boston financial analyst raised similar concerns.

"We are deeply concerned about the direction and pace you and the board are currently taking and have been dissatisfied with the company's results. Given the company's recent weak operating performance, we believe that the majority of Novell's shareholders share our discontent," Lind and Jackson said. "Our conviction is firm in the future promise of the company. The question is whether the current management and board will execute."

The Blum letters were disclosed in a regulatory filing last week.

In response, Novell declined to comment beyond a statement saying, "We're very committed to working with our shareholders and we take their concerns seriously."

However, Novell Chief Executive Jack Messman warned employees about the Blum and CSFB reports in an internal memo sent to employees on Friday and seen by CNET News.com. He said the company is dealing with the financial situation and urged employees to "keep your individual job in focus. In every way and every day, the important work you do supports our customers and business partners."

"I promise you that our management team, along with our board of directors, will continue to work diligently to improve shareholder value and keep the best interests of our customers and employees in mind," Messman said.

In its most recent quarter, ended July 31, Novell's revenue dropped to $290 million from $305 million a year earlier. Its net income was $2 million, or nil per share, compared with $24 million, or 6 cents per share, the previous year. The company's stock has increased from $6.55 to $7.27 over the last year.

Novell has reorganized its North American sales force to try to improve its financial performance and now is doing the same--plus --in Europe.

Blum complained last week that Novell had replied only with a "terse, one-sentence correspondence thanking Blum Capital for our input," leading the investors to believe Novell wouldn't seriously consider its proposals.

But in Messman's memo, the CEO took issue with the suggestion that his company had ignored Blum. "Novell has responded and will respond to shareholder concerns in a timely manner," Messman said.

And while he acknowledged that "I have strongly emphasized that (Novell's) financial performance has been unacceptable," he pointed to progress such as "improved business performance in North America, and very positive signs in a number of our product areas, such as OES (Open Enterprise Server), our identity management and Zenworks suite of products, and early strength in emerging countries like China and India."

Blum had four specific suggestions:

• Novell could save $225 million in 2006 expenses by cutting research and development, sales and marketing, and general and administrative functions.

• Novell could generate about $500 million in cash by selling off several groups. It estimated Celerant is worth $175 million; Zenworks $150 million; Groupwise $100 million and Cambridge Technology Partners $75 million.

• The investors supported Novell's attempt to sell a mixture of proprietary and open-source software atop a Linux foundation, "but we feel the window of opportunity to achieve this goal is much narrower than Novell's current perception."

• And Novell should repurchase $500 million worth of shares--about 80 million shares, or 20 percent of the company's outstanding stock, Blum said.

"Implementing all of our proposals, we estimate run rate 2006 earnings per share would be approximately 30 cents, growing approximately 20 percent per annum thereafter for the next several years," Blum said.

Messman has changed some executives in the company. In May, he , who led the reorganization of the U.S. sales force, to lead field operations for the whole company. And in August, he named to fill Hovsepian's former role.

On Monday, Novell disclosed in a regulatory filing that Heystee will be paid $400,000 with a possible bonus of the same amount. She also received 200,000 stock options and a reimbursement of up to $200,000 for expenses for moving to Waltham, Mass., where Novell is headquartered.

Correction: This article originally stated Blum Capital thought it could generate $500 billion in revenue by selling off several groups. That number should be $500 million.