Novell to be Acquired by Attachmate - Analyst Blog

Acquisition Details

Enterprise software developer, Novell Inc. (NOVL) announced that it will be acquired by Attachmate Corporation, a software company supported by private equity firms such as Golden Gate Capital, Francisco Partners and Thoma Bravo. Novell expects the deal to close in the first quarter of 2011.

Attachmate Corporation will acquire Novell for $6.10 per share in cash in a transaction valued at approximately $2.2 billion.

The purchase price represents a premium of 28.0% to Novell's closing share price on March 2, 2010 (when Elliott Associates offered to buy Novell in a deal valued at about $1 billion) and a 9% premium to Novell's closing stock price on November 19, 2010.

Novell was approached by various other entities this year for a takeover. In March, Novell rejected a buyout offer from the investment firm Elliott Associates L.P., citing the proposal of $5.75 per share (49.0% over the company's enterprise value) in cash as inadequate and undervaluing the company's franchise and growth prospects. Elliott Associates will become a shareholder of Attachmate under the latest offer.

We believe Novell's Linux assets deserve premium valuation as it has a valued customer base and generates significant revenue. Novell remains the #2 maker of the open source Linux operating system behind Red Hat (RHT).

Following the acquisition news, Novell shares rose by 37 cents, or 6.6%, to close at $5.96.

Novell also announced that it has entered into a definitive agreement for the concurrent sale of certain intellectual property assets (more than 800 patents) to CPTN Holdings LLC, a consortium of technology companies organized by Microsoft Corporation (MSFT) for $450 million in cash. This is reflected in Attachmate's total purchase price.

Attachmate plans to use as much as $1.09 billion of debt for the purchase. Attachmate will operate Novell as two separate business units, namely Novell and SUSE (its open source business) and will integrate them with its other holdings, Attachmate and NetIQ. Novell had acquired the Germany-based SUSE AG in 2003. We believe the SUSE-Linux acquisition will boost Attachmate's competitive position going forward.

Novell will be required to pay $60 million to Attachmate if it accepts a superior bid. If the deal fails to materialize for some other reason, Attachmate might have to pay Novell $120 million.

Attachmate's acquisition of Novell is subject to customary closing conditions, including regulatory approvals and clearance under the Hart-Scott-Rodino Act. It is also dependent on the closing of the proposed sale of certain intellectual property assets to CPTN Holdings LLC. In addition, the transaction is subject to approval by Novell's stockholders.

J.P. Morgan (JPM) is serving as financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Novell.  Credit Suisse and RBC Capital Markets are serving as financial advisors and Jones Day is acting as legal advisor to Attachmate.  

Our Take

Novell believes that the deal would add value to customers and would complement its existing product portfolio. In our opinion, the potential acquisition will boost Attachmate's customer base and enhance its cloud computing abilities, thereby driving top-line growth over the long term.

Novell has an impressive clientele, including Xerox Corp. (XRX), Ericsson, General Electric Co. (GE) and Monsanto Co. (MON). Novell also has partnerships with VMware Inc. (VMW) and another virtualization company Citrix Systems Inc. (CTXS), providing interoperability between their products and extending joint technical support to customers.

Despite having a diversified portfolio and strong customer base, Novell remained undervalued particularly due to weak top-line growth in recent times. The company had $1.04 billion in cash and short-term investments at the end of the third quarter. In the recently concluded third quarter, revenues decreased 8.0% to $199.0 million from $216.1 million in the year-ago quarter due to weak license, maintenance and subscription services.

Overall, revenues have declined 6.0% so far in 2010, and analysts' current estimate calls for another decline in 2011.

Sluggish growth, coupled with a lack of visibility over management's long-term strategy, made it difficult for Novell to compete against larger rivals such as Microsoft, Oracle Corp. (ORCL), Red Hat, EMC Corp. (EMC) and VMWare, all of which are focused on growing their businesses in the rapidly growing cloud computing market.

Considering the struggle to sustain growth, we believe the $1.2 billion valuation (net of cash), or 1.5 times sales is good. We expect the deal to be completed once it passes all regulatory hurdles.

Currently, we maintain a Neutral rating on Novell on a long-term basis (6-12 months). Novell has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

 
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