Hedge Fund Serves Up $2 Billion Offer For Novell

After the close of trading in U.S. stock markets on Tuesday, Elliott Associates, L.P., a hedge fund with a significant position in shares of Novell, placed an unsolicited offer to buy the company for $2 billion. Its offer of $5.75 per share in cash is well above Novell's closing price today of $4.75 per share, and caused Novell's shares to rise above $6 in after hours trading. The offer places a high valuation on Novell, and the troubled company will have to consider it very carefully.

According to Elliott Associates L.P.'s offer letter:

"Based on our detailed review of the Company's publicly available information and our substantial knowledge of the software industry, we are pleased to submit this proposal to acquire all of the shares of common stock of Novell for a cash price of $5.75 per share.  This price represents a premium of 49% over the Company's current enterprise value and 77% over the Company's 90-day volume-weighted average enterprise value."

It continues:

"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.  As a result, we believe the Company's stock has meaningfully underperformed all relevant indices and peers."

While the $2 billion offer may seem high at first glance, it's worth remembering that Novell has nearly $1 billion in cash, and reported $220 million of revenues in its most recent quarter. We've made the point before that with Sun Microsystems under the wing of Oracle now, Novell and Red Hat remain the only large, publicly traded U.S. companies focused almost entirely on open source software. We've also noted that the large cash positions that both Red Hat and Novell have make them prime acquisition targets (although rises in Red Hat's stock price have made it less attractive).

If Novell accepts the new offer, it will no longer be an independent company, leaving only Red Hat among big publicly traded firms to focus on open source. Without a doubt, Novell's long-suffering shareholders will call for the offer to be taken seriously. Novell officials have yet to comment, but Elliott Associates L.P.'s offer is high enough that a shakeup could be imminent.

Image courtesy of Flickr user King76.