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Novell to chop 600 jobs, shed division

Layoffs are part of major restructuring at the server software maker. The sale of a division could cut at least 400 additional jobs.

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Stephen Shankland
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Novell announced a major restructuring Wednesday, under which it will cut 600 jobs, switch its focus to Linux and digital identity software, and take action to split off its Celerant consulting group.

More than 10 percent of the server software maker's 5,800 work force is immediately affected. However, further jobs could be shed as the Waltham, Mass.-based company divests Celerant, which has more than 400 employees, Novell said.

Novell has been searching for a successful business strategy to replace sales of the NetWare server operating system that carried the company to success in the 1980s and 1990s. Microsoft Windows surpassed it in the mid-1990s, Linux has become another threat, and now the company is cutting back in the Provo, Utah-based NetWare division.

But NetWare no longer is the core of the company, said Ron Hovsepian, who joined Novell in 2003 and was promoted to president and chief operating officer Tuesday. "The DNA of the company has changed in my very short tenure," Hovsepian in an interview. "The soul of the company is open standards and open source."

The job cuts should reduce annual expenses by about $110 million but will require a charge of $30 million to $35 million for the company's fiscal fourth quarter, which ended Oct. 31, Novell said.

"While it is a difficult decision to eliminate positions in our talented and dedicated work force, this move is necessary to ensure that our costs are more closely aligned with our business strategy," CEO Jack Messman said in a statement. "This is a decisive, yet disciplined, cost-reduction action that balances the need to be fiscally prudent with the need to continually seek growth opportunities and generate long-term profitability in a highly competitive marketplace."

The server software company has been under major pressure from shareholders. Blum Capital Partners, which owns more than 5 percent of outstanding shares, has urged major changes at Novell, including a greater emphasis on Linux and open-source software. The pressure extends to Messman: Credit Suisse First Boston Jason Maynard called for management changes in an open letter published in September.

Restructuring is necessary for the company, said Katherine Egbert, a Jefferies securities analyst. "Shareholders don't always know best, but in this case it's clear they have some businesses that are in decay," including NetWare, ZenWorks and GroupWise, she said. "They're doing what they have to do."

But Egbert doesn't believe that Wednesday's changes are enough. "They've chronically said the goal for Linux is not to build a Linux-based business," as rival Red Hat has done, she said. "The goal is to make themselves relevant and to upsell customers with GroupWise and ZenWorks and identity."

Blum Capital declined to comment on whether the moves satisfied its demands for change.

In after-hours trading, Novell's shares were unchanged from the close of $7.47.

Novell said it has hired Citigroup to explore strategic options for Celerant. The company has already said it hoped to sell the subsidiary.

Novell also is paring back technology consulting work in some geographies, work that's separate from the Celerant subsidiary, Hovsepian said. Novell will keep the work in the United States, United Kingdom, Japan, Germany and other major markets, but in less developed areas will leave the work to business partners.

Boosting Linux
The company is trying to boost popularity of its Suse Linux Enterprise Server product. When customers buy NetWare, Novell now includes Linux in a double-whammy product called Open Enterprise Server.

The Linux side of the equation is on the rise, said Bill Hewitt, chief marketing officer. "As we migrate customers from NetWare to OES, we're putting more resources in OES and less in NetWare," Hewitt said.

At the same time, there was "virtually no impact" to the Linux development team, Hovsepian said.

Key to the Linux plan is the OpenSuse, a version the company hopes outside developers will help build, test and debug. About 5,000 copies of the software are being downloaded daily, Hewitt said.

During the past six months, Hovsepian has retooled incentives to move the company's sales force away from the comfortable NetWare business and toward Linux and other newer areas.

"We focused the team on making sure we focus on new software growth as a business for the company versus the renewal part of our business. We made shift in weighting at a high level," Hovsepian said. Now that fiscal 2006 has begun, "the sales plans have a lot more homogeneity."