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Novell Buys SUSE in Three-sided Deal with IBM

Novell Buys SUSE in Three-sided Deal with IBM

Novell, a down-on-its-luck has-been that hasn't made any money in three years, is buying SUSE LINUX a Linux second stringer that hasn't ever made any money.

It's paying $210 million in cash, something like seven times SUSE's run-rate, when the norm right now is a lot less, suggesting Novell overpaid though with Red Hat stock going for 20 times revenues maybe it didn't. (Of course, Red Hat at 20 times revenues is a remnant of the distorted bubble, but that's another story.)

Novell says the acquisition will be a wash as far as earnings go in '04, but has hopes it will turn "positive longer-term."

The move is the capstone of a strategy put together by Novell vice-chairman Chris Stone that's meant to save the once great Novell from its near-death experience and transition it from being an old-fashioned proprietary company to one of these sexy, upstart, presumably Microsoft-proof open outfits so the Evil Empire can't gnaw on its liver anymore like it's been doing for years.

As strategies go, this one is derivative. Old timers at Novell must be going around with a déjà vu all-over-again feeling. The last time Novell tried to reinvent itself and become a greater threat to Microsoft, it bought Unix from AT&T.

That move became the kiss of death for Unix, making it into a shopworn hot potato passed from company to company until it landed with a Novell-associated firm that ironically enough is now threatening to use it to destroy Linux. Novell has tried to break away from its heritage several times and came a cropper every time.

There's another irony to this situation - that's the fact that SUSE might actually be looked at like Caldera 2. Caldera was SCO's name before it changed it and part of its original charter by virtue of the close family relationship between Novell and Caldera - Caldera having been started by Novell's ex-great CEO Ray Norda- was to be the Novell-friendly Linux, and it was there for a while.

Novell's current strategic intentions - which are ultimately to upset the current balance of power - were glimpsed initially in August when it bought Ximian, the Linux desktop start-up, for an unknown price. Reports of Novellâs interest in the 11-year-old SUSE, which was said to be looking for money, then started circulating and the latest bit of gossip claimed Novell had been frustrated in its bid over price.

Supposedly it was spooked into spending 28%-29% of its $739 million bank account on SUSE out of fear SUSE's shareholders either wouldn't sell at all or that they would sell to somebody else - like Fujitsu Siemens, Red Hat, or Sun Microsystems, the rumor mill says, though we have our doubts about a couple of those names.

IBM, itself strategically dependent on Linux and a vital cog in the Linux channel, has effectively - not to mention oddly - extended its hands in benediction over the union by agreeing to make a $50 million investment in Novell convertible preferred stock when the Novell-SUSE marriage is consummated. The transaction is supposed to close by the end of January.

It's not clear whether this investment makes Novell's actual cost $160 million or not. Heck, it raises questions about whether the acquisition was really Novell's idea or the result of some seeds planted by IBM, which gets a twitch every time it thinks about Red Hat turning into the next Microsoft. It would certainly be ironic if Novell eventually turned into something that kept IBM up nights.

Maybe the investment's a reward for Novell coming to IBM's aid trying to undercut the IP claims of Unix' current owner, the SCO Group, which is suing IBM for $3 billion for allegedly pilfering its Unix code and illegally throwing it into Linux.

The investment's left everybody with the feeling that it's somehow tied in with Novell's lingering IP rights in Unix and SCO's suit.

There's press speculation it might give IBM a hall pass on indemnification, an issue that Novell claims it doesn't know how it will handle and that IBM has publicly refused to have any truck with, and by sharing Novell's alleged cloak of immunity - by virtue of the residual rights it claims to own in Unix - checkmate the SCO suit.

Novell claims to be able to absolve people of violating their Unix licenses and did that for IBM after SCO sued. SCO's reaction to the Novell-SUSE deal, by the way, was a cryptic canned statement about how the IP issues are "controversial and unsettled" and how "this acquisition raises a lot questions" and how "They are willing to take on a great deal of risk," whatever that means.

IBM's investment hasn't been "price" yet, they said during the conference call on Tuesday, but evidently it could give IBM around 2% of Novell and will let Novell wave a Blue pennant under the noses of potential accounts impressed by the letters I.B.M. Accounts also like having a second source.

Committed IBM watchers, committed because they used to work there in responsible positions, figure this $50 million investment is only the first slipper to hit the floor. It's sort of like a probe, they think, and if it feels good, IBM will be back for more. There is the little matter of Novell's eDirectory and the fact that IBM probably chokes at the thought of Microsoft's Active Directory, the only other comparable directory around. A directory, by the way, is a Web services necessity.

The SUSE acquisition is plainly a threat to both Microsoft and Linux market leader Red Hat. Stone, though, claimed in the call that the point of the exercise wasn't to compete against Microsoft. It was really meant to "reduce the impediments to Linux," which might strike the idle bystander as being much the same thing.

As far as Red Hat goes, well, Novell figures on being the big dog of Linux.

Novell, despite its prolonged vegetative state, is still a billion-dollar company, with a loyal, if abused, following and a global reach and infrastructure, something Red Hat doesn't have. The Novell security blanket is going to push companies into Linux that had reservations about doing business with pissant little companies like SUSE and Red Hat.

The acquisition has companies like HP and Computer Associates beaming their good wishes and the Open Source Development Lab, where Linux creator Linus Torvalds works, positively giddy with delight at the prospect of Linux breaking out the hedgerows.

Red Hat CEO Matthew Szulik dismisses the deal as a "press release." Szulikâs been lucky. SUSE, despite a few tries, has been unable to capture a beachhead in North America, a situation that's presumably about to be corrected. Ya know, there are people saying that Novell's educational capacities alone, its history of training up NetWare-savvy engineers and administrators, is worth its weight in gold.

Novell claims to have a technical staff of 600 trained to support Linux and that's only a third to half of its engineers and consultants.

Red Hat, which was first to corral IBM as a distributor, has to be worried about how far the relationship between SUSE/Novell and IBM will go.

IBM and SUSE say they are negotiating extensions to their commercial agreements "for the continued support of SUSE Linux on IBM's eServers and middleware products to provide for product and marketing support arrangements related to SUSE Linux."

Like IBM's investment, by which it's assumed to be limiting the exposure of its customer base, the extended deal will go into effect after the Novell acquisition closes.

SUSE beat Red Hat to the punch with versions of its distribution for IBM's precious mainframes as well as its Unix and the old AS/400 servers. It's unclear how happy IBM might be with Red Hat's ports.

Then too, for what it's worth, Novell previously promised to put its middleware on the two main Linux distributions and although it talks about still supporting Red Hat, its heart will obviously belong to its own operating system.

The Novell-SuSE tie-up also puts Linux on the best competitive footing against Microsoft that Linux has ever had.

Novell is, after all, a big software company - and will perforce be the biggest of the Linux houses - with a 20-year track record in network operating systems and experience in building an ecosystem. Its Linux interests will range from the desktop to the server.

What's more, it knows a thing or two about street fighting. Novell is an old Microsoft foe, the first rival to complain to the Justice Department about it, a tactic that eventually resulted in the government lodging that antitrust suit against Microsoft.

Suddenly the odds are a lot more evenly matched.

Prudential, which just started covering Red Hat and has made it a pet, thinks that Red Hat will continue to be the leading Linux distribution and that Novell is going to have problems replicating the "success of the Red Hat operating model."

The brokerage thinks that Novell will be challenged in switching from proprietary to open source and have difficulty explaining exactly what its long-range strategy is to customers, its channel and technology partners. It thinks Novell will have some success in moving its installed base from NetWare to Linux, but that it "will face issues outside of the installed base." It's betting it will take Novell at least several quarters to begin addressing the broader market with Linux and that it needs to get the support of ISVs and IHVs.

Novell says it will keep the SUSE brand and that SUSE CEO Richard Seibt, an ex-IBMer wise to the way of larger companies, will be responsible for the integration and he supposedly has 60 days to figure out how to do it. In April Novell pledged to make all the services that run on its dying NetWare operating system run on both the NetWare and Linux kernels to make migration easier.

It's unclear exactly how SUSE will be structured under Novell's wing. SUSE currently has 399 employees and a run rate of $31 million, the latter number confirmed by SUSE spokesman Joe Eckhart, though Novell CEO Jack Messman muttered something about it doing $35 million-$40 million this year. Seibt has previously said SUSE needed $48 million to break even. Last year SUSE reportedly did around $38 million.

Novell apparently isn't expecting to lay off many of the SUSE people or to close its Nuremberg headquarters in Germany - probably a mistake - its strongest market. It said there was little overlap in staff, only some administrative jobs. Novell also said it found an "amazing" amount of channel duplication, though whether Novell still has those 20,000-30,000 resellers worldwide that it claims to have, well, guess we'll just have to see.

Wall Street, encouraged by IBM's investment, boosted Novell's stock up something like 22% to, oh, $7.38. It's trailed in at $2.14 this past year.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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