Elliot Associates' worrisome Novell plans

Elliot Associates L.P., a hedge fund, which claims to already own 8.5% of Novell's stock made an unsolicited bid to buy the Linux company lock, stock, and code for $1.8 billion on March 2nd. This move may be good for Novell stock owners, but I fear it may be death for Novell's commercial SUSE Linux and community openSUSE distributions.

Some people in the know, like Canonical's COO Matt Asay think this deal could work for SUSE. In his view, Elliot would do well to sell off Novell's Linux division.

I wish I could agree with him, but I looked at Elliot Associates' past history of taking "an activist approach to investing, frequently amassing significant but minority stakes in distressed or under performing companies and attempting to foment change," and I don't like what I see.

Elliot Associates is best known as a 'vulture fund.' They don't make investments to turn companies around. They make investments to crush the cash out of them and then leave the picked over bones for someone else to pick up.

In Novell's case, they won't have to look far for the money. Novell has been cash rich for years. Even now, after some mediocre quarters, the company still has $991-million in cash and equivalents (PDF Link). These funds are just sitting there ripe for the picking by a group like Elliot Associates. Historically, these resources have kept Novell stable even while stockholders have wanted Novell to buy back its stock with the cash, and, oh, by the way, fire some more employees and sell off some divisions.

Back in those days in the mid-2000s, Novell management changed but its ownership remained stable and the company has ended up staying the Linux course. Of course, some people, like Boycott Novell really, really hate Novell's Microsoft partnership, but Novell has done well by its Linux business. Indeed, Novell's Linux business finally broke even in the last quarter.

But Novell hasn't done as well as its investors would like. Novell remains a perpetual also-run to Red Hat in the Linux business. This makes me worry that Elliot Associates will successfully buy Novell and take the company private.

Then, what I fear will happen, is that they'll take the cash -- if Elliot Associates are good at anything it's getting the cash -- and then slash and burn the rest of the company. My compadre Brian Proffitt over at ITWorld put it well when he wrote, "I don't believe Novell will survive the vivisection that could occur if the acquisition goes through."

Certainly Elliot Associates' publicly proclaimed plan for Novell -- which includes the admission that "Over the past several years, the Company has attempted to diversify away from its legacy division with a series of acquisitions and changes in strategic focus that have largely been unsuccessful" -- makes no sense what-so-ever. For starters what legacy divisions is this talking about? Ironically, NetWare, which made Novell a networking power in the 1980s, comes to its end of general support on March 7th. Novell's past is dead and buried. Its future, as a real company, lies in Linux and cloud computing.

Some people would have it that this takeover attempt is Elliot Associates acting as a cat's paw for Microsoft or another Linux enemy. I don't see that. Microsoft benefits from having Novell as a partner. Their partnership is Microsoft's bridge to companies with Linux as part of their infrastructure.

So, is there any hope? I think so. This isn't the first time an investor tried to squeeze cash out of Novell and failed. Blum Partners tried back in 2005 and their efforts came to little. In addition, if the deal really looks like it might happen, I see two possible white knights moving in to out bid Elliot Associates.

The first is IBM. While Red Hat is the major player in x86 servers, when it comes to mainframes, SUSE Linux is the most important distribution. While IBM really, really doesn't want to buy a Linux distribution of its own, I can't see them letting SUSE Linux disappearing as a commercial distribution either.

And then there's Microsoft. Yes, I'm serious. I don't think Microsoft wants to be in the Linux business either. They make their billions from proprietary software thank you very much. On the other hand, Novell has been pretty darn handy in keeping even Linux using companies tied to Microsoft server technologies like AD (Active Directory).

Microsoft makes more than its fair share of mistakes, but I think its deal with Novell has worked quite well for it over the years. In addition, the guys from Redmond know quite well that the IDC server numbers tell only part of the story and that Linux continues to make big server gains. So long as they're on good terms with Novell, they have an automatic in with businesses that might otherwise turn completely to a Linux-based server infrastructure.

This isn't just generalities. For example, Microsoft's Hyper-V virtualization software, especially in Windows Server 2008 R2, does an excellent job of supporting SUSE Linux as a guest operating system. That's quite deliberate. Novell and Microsoft have been working together for years to support each other on their respective virtualization platforms.

Would Microsoft be willing to give these advantages up? I doubt it.

If I were either IBM or Microsoft, I'd be watching Elliott Associates' moves toward Novell like a hawk. I think it's quite possible for Elliot Associates to throw SUSE Linux into the trash, and neither company wants that to happen.