Novell took a several hundred million dollar step this week designed to help the company "return to its roots."
On Wednesday, the software giant announced it would sell its UNIX software products to Santa Cruz Operations, one of the leading suppliers of the UNIX operating system and UNIX applications.In exchange, Novell will receive 6.1 million shares of SCO common stock (NASDAQ: SCOC), giving it approximately 17 percent ownership in the California-based software firm.
In addition, Novell will also receive a royalty stream through the year 2002 back from SCO based upon sales of the purchased UNIX products, not to exceed $84 million (in 1995 dollars).
According to terms of the agreement, SCO will acquire Novell's UnixWare business and its UNIX intellectual property. For its part, SCO intends to meld its Open-Server 5 with UnixWare 2 into a high-volume UNIX operating system containing NetWare networking services.
The "merged" product is slated for release in 1997. Additionally, SCO stated that it intends to hire some of the Novell employees currently working on the UNIX products.
In a related announcement, Novell, SCO and Hewlett Packard also announced a strategic relationship aimed at further fostering the UNIX platform.
Understanding why
At least one market analyst thinks this week's move by Novell was a positive step.
"I think this is a very good thing," said Jamie Lewis, president of The Burton Group, a Salt Lake City-based market research firm that specializes in the computer networking field.
"Novell with UnixWare seemed to be headed into a head-to-head battle with Windows NT (from Microsoft). "Novell is not a credible supplier of UNIX. Novell never gained credibility in the UNIX marketplace. And it was facing, at best, an uphill battle (with Microsoft)."
Lewis said that for a time Novell seemed focused on trying to be all things to all people. This week's announcement, he said, was a "course correction back to where its strengths are. It's a return to its roots."
At least one former Novell employee was not surprised by the announcement.
"UnixWare, and anything associated with UNIX inside of Novell, was going nowhere," said one former employee who asked not to be named.
Compelling strategy missing
One computer industry editor suggested that Novell management had hoped UNIX and Unix-Ware would help easily defeat Microsoft in the battle for software dominance.
"I think this move means that Novell has realized that this direction was not going to be a short-term punch to take out Microsoft," said T.C. Doyle, industry editor for VAR Business, a leading computer trade magazine.
"It's not so much that they were on the wrong track, it's that they were getting swallowed and did not have a compelling strategy to beat Microsoft.
"Novell clearly recognizes that itdid not have the right corporate structure or strategy to compete with Microsoft. They are now changing their strategy, and rearranging the company, to better compete with Microsoft."
"It's the smartest thing they could do with it (the UNIX products)," said one industry participant, "but it's sad that it's come to this."
In fact, added The Burton Group's Lewis, "By not going head to head against Microsoft, they become that much stronger."
Wall Street reaction?
Interestingly, the reaction on Wall Street seemed to impact SCO more than Novell. During the past year, SCO stock has traded as low $5.50 to as high as $15.00 per
share.
According to Kelly Spencer, a broker with the Salt Lake City office of Everen Securities (formerly Kemper Securities), SCO has averaged about 200,000 shares traded per day during the past three months. Naturally, during the past week, more SCO shares traded hands on a daily basis, with 2 million shares being traded on the day before the announcement.
SCO shares on Sept. 19 finished at $11.875, up $1.375 for the day. On the day of the announcement, SCO finished at $9.75, down $2.125 for the day, or nearly 18 percent.
On the other hand, Novell shares barely moved on the announcement, finishing Wednesday down only 183/4 for the day.
"It looks like the market took it as a non-event for Novell, while the market is acting as if SCO gave up too much," Spencer said. "Personally I thought Novell would go up."
Looking at it another way, if you do the math, you see that Novell's market capitalization dropped $69 million on the day of the announcement, while the value of its holdings in SCO come in at $59 million. The end result? Essentially it's a wash.
Final perspective
Novell originally paid $350 million in February 1993 to AT&T to purchase its rights to UNIX. Since then, Novell had sold a "lifetime" license to Sun Microsystems for $80 million for the use of Novell's UNIX.
Sometime earlier this year, Novell management realized that it's long-term opportunities did not lie with UNIX, so it began looking for potential suitors for the business.
This decision was made easier by the fact that Novell was spending tremendous resources on perfecting and improving its UNIX products - a dollar amount analyst Lewis suggested was equal to the total being spent annually on NetWare development.
(Note: Last fiscal quarter, Novell spent more than $90 million just on R&D. Even if only one-fourth of that total was being spent on UNIX R&D, that adds up to potentially $90 million dollars of annual UNIX R&D expenditures. That's a lot of cash. In fact, that's roughly the amount of profit Novell made last quarter.)
Interestingly, for as much as everyone has said this sale/part-ner-ship is being done to avoid Microsoft, I find it amusing that Novell will soon own 17 percent of a company that Microsoft had previously purchased 20 percent of.
Is it just me, or is this a weird deal?