Novell Says Nope

Mar.23.10 | About: Novell, Inc. (NOVL)

By Brenon Daly

The only surprise about Novell (NASDAQ:NOVL) turning down the unsolicited $2bn offer from Elliott Associates was the timing. In an unorthodox move, the software vendor said ‘thanks, but no thanks’ to the hedge fund on Saturday morning, when most thoughts were turning to a full day of March Madness. (And what a maddening day it turned out to be, at least for people who filled out their brackets with top seeds: On Saturday, teams seeded No. 1, No. 2 and No. 3 all got sent packing.)

In dismissing the bid, Novell’s board of directors said the offer from Elliott of $5.75 for each share ‘undervalues’ the company and its growth prospects. As an aside, we’re not exactly sure what growth Novell is referring to. The vendor has come up short of Wall Street revenue estimates for both quarters of its current fiscal year so far, and sales this fiscal year, which ends in October, will almost certainly come in below the $862m it recorded last fiscal year. Revenue in the following fiscal year is also likely to come in below last fiscal year, at least according to Wall Street projections.

Even without much top-line excitement, Novell does nonetheless have some valuable assets: A bankable $600m maintenance revenue stream, a decent Linux business and probably the fourth-largest portfolio of identity and access management technology. Of course, its most attractive property is its treasury, which is stuffed with a cool $1bn in cash and short-term investments.

And finally, we would note that Novell does have an experienced adviser in JP Morgan Securities as it explores options to enhance shareholder value. In just the past 10 months, JP Morgan has worked with two other long-in-the-tooth software companies that have been targeted in publicly contested M&A processes. Both Borland Software and MSC Software ended up getting sold, with Borland going for a whopping 50% higher than the initial bid.