More on the Novell private equity exit…

An old friend from Novell sent me her own analysis of the viability of a Novell private equity exit (following on my own half-baked effort). I asked her permission to post, and she agreed. I think it’s a solid starting point for anyone thinking through how to help Novell out of its legacy past so that it can focus on the future.

I don’t know who you talked to about the buy-out, but that’s exactly right. I’ve done the math differently than you, but the result is the same. It’s a victimless crime. If you assume the $2.5b market cap (@$7.30/share) with a 30% premium, that’s $3.25b less $1.8b in cash and cash-like things for a total of $1.45b.

One of our challenges has been to manage a portfolio business; Novell is really holding three distinct businesses (legacy stuff, open source, and identity) with different characteristics. Novell is:

• 33% legacy: Groupwise and Netware (and parts of Zenworks?). Valued at 3-5 years DCF; sell GroupWise to Messaging Architects or open source it and build the business around technical services; but focus and clarity here would help a lot. This is a transactional low-touch sale, no expensive sales force necessary. A classic cash cow. Could be sub-divided further.
• 25% Identity Management: Sell to SAP (valued as going concern) or keep independent, in which case it retains the Novell name. This is a viable stand-alone business, profitable, with normal R&D investment required. Open sourcing it I suppose is an option, but customers I talk to don’t really care how the sausage is made as long as it’s tasty. This is a high-touch sale, with a lot of consulting involvement, both Novell consulting and partners. [Matt note: I believe 80% of Novell’s consulting business is around Identity Management. Novell’s consulting team is top-notch and could continue to build value around IM.].
• 33% Services: Principally NTS (Novell Technical Services), but also consulting and training; cleave off with their respective other pieces, easy to do with minimal disruption. So you end up with a legacy business (or two), an identity business, and a Linux distribution, each with a services arm.
• 7% Linux: branded as Suse with some Zenworks elements (ZLM, Orchestrator); taken back as a stand-alone public company trading at Red Hat-like multiples. [Btw, I talked with an old friend from SUSE not long ago, and we both agreed that SUSE probably would have done better on its own, left to fend for itself, than it has under Novell. It’s not that Novell is a bad company, but rather that Novell’s legacy has confused its future….]

I estimated, at some point, the disaggregation costs at $20m but the real story is how easy it would all be; there’s very little coordination right now between, say, GroupWise and Orchestrator. The disruption would be at Waltham, principally, and to a lesser degree with the sales force(s). (I wouldn’t weep for Waltham….)

The percentages come from our financials:

Zen 15%

Identity 11%

Linux 7%

Netware (and OES) 23%

Groupwise 10%

Services (NTS, consulting, training) 33%

Anyway, the question is not if this is a good idea; obviously, it is. The question is: why hasn’t it been done already? I know that it’s been pitched internally before but it didn’t go anywhere. Is there a horrible poison pill that makes this less appealing? Was the private equity community put off by the backdating scandal? Is there some deal with IBM? (All senior management, it is worth noting, are former IBM, and all new hires.)

A far more elegant and reasoned argument for why Novell makes sense as a private equity target than I put forth. Reading my friend’s analysis, it really is surprising that this hasn’t been done. Put Chris Stone back in charge of the Linux business, strip away all the baggage, and let SUSE really compete with Red Hat and Ubuntu again. The only thing Novell has to lose is its chains….