THE DAY AHEAD: Can Novell remain independent for long?
When Novell (Nasdaq: NOVL) topped third quarter earnings estimates Wednesday it took a baby step toward restoring the credibility it lost in the previous quarter. The big question is whether Novell will remain independent long enough to win back Wall Street's trust.
Novell shares got a nice pop earlier this week on rumors that IBM (NYSE: IBM) was planning to buy the company. On Wednesday, chatter about possible Novell spin-offs emerged.
Novell, based in Provo, Utah, topped First Call Corp.'s consensus estimates of 2 cents a share, but didn't win any fans on its conference call. Analysts cut earnings and revenue targets dramatically after the company's second quarter debacle, making the third quarter upside surprise moot. In the second quarter, Novell unraveled and management didn't have any answers.
Officials didn't have answers on Wednesday either. Revenue growth projections? Forget it. CEO Eric Schmidt, who noted the company will continue to cut expenses, also shot down talk about spin-offs and acquisitions. "People love to generate rumors," said Schmidt. "It's important to consider shareholder value, but we don't have any plans specific enough to talk about."
Unfortunately, Wall Street is wondering what Novell's plan looks like. In a nutshell, here's Novell's problem -- it is run like a technology think tank and not a business. Analysts said Novell has nice technology, but no future.
And Novell execs indicated that they didn't get the shareholder value concept. Schmidt admitted he didn't understand how Novell broken up would be worth more than a whole company. Officials also said competitors have done a better job pitching themselves as e-business leaders, but offered no insight to how Novell would counter that perception.
That lack of Wall Street savvy along with Novell's laid-back culture doesn't bode well for the future. Wall Street analysts, still fuming about the second quarter miss, want progress now. Some analysts think a takeover makes the most sense because Novell, which isn't going to make any bold moves, just doesn't have the killer instinct to make a run. An acquirer would take Novell's technology, boot the management, change the culture and make some money. Novell would be left to do what it does best -- develop software.
Here's a list of companies that would most likely buy Novell.
1. IBM: Still the leading candidate. IBM would take Novell Directory Services and NetWare to bolster its e-business software package. Big Blue would also do away with Novell's laid-back Utah culture and light a fire under developers. Analysts said the IBM deal makes the most sense.
2. Lucent (NYSE: LU): If it weren't for Lucent's own problems, a Novell acquisition may have happened already. Why? Leading networking companies want to bundle software with hardware. Novell has strong network software to bundle. In addition, Lucent and Novell are already working together. Lucent's Bell Labs and Novell are working to create a platform that will easily be customized over wired and wireless networks.
3. Sun Microsystems (Nasdaq: SUNW): A distant third. Sun and Novell already have an alliance, and Novell CEO Eric Schmidt used to work at Sun. Given the companies' software collaboration, it would make sense for Sun to spin off its software business (Java and Jini) and merge it with Novell. Schmidt would run the company, which given Novell's woes may not be a good thing.
4. Hewlett-Packard (NYSE: HWP): Former HP CEO John Young sits on Novell's board and could be a link in making this acquisition happen. Analysts said HP would merge Novell's networking software with its OpenView platform, which manages networks, servers and applications.
5. America Online (NYSE: AOL): Analysts didn't rule out AOL buying Novell. After all, AOL bought Netscape and has an enterprise business via its relationship with Sun. AOL and Novell have also collaborated on messaging software. The AOL-Time Warner merger, however, makes this scenario look like a long shot.
6. Cisco (Nasdaq: CSCO): Following the same logic as Lucent, Cisco could be interested in Novell to bundle software with its hardware. The catch? There are major cultural differences and Cisco could alienate Microsoft, a key software partner. Chances of Cisco buying Novell are about as good as Microsoft (Nasdaq: MSFT) buying the company. TDAIN
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