The Linux Business That Troubled Novell May Be Headed In New Directions

As we reported yesterday, hedge fund Elliott Associates L.P. has made an unsolicited $2 billion offer to buy Novell, one of only two remaining large, U.S. public companies focused on open source. In November of last year, we were already noting that both Red Hat's and Novell's pummeled stock prices, complemented by huge cash positions, made them ripe acquisition targets. Red Hat bounced back since then, but Novell never did, and whether the Elliott offer or another one comes through,it's looking unlikely that Novell will remain an independent company. How will this impact the tech industry, Linux, and open source?

I can clearly remember the days when Novell was an up-and-coming company, competing with Microsoft very directly, and pioneering many of the technologies that allowed personal computer networks to proliferate. Over the years, it became something of a shell of what it once was, as I constantly noted events like the cancellation of the company's once mighty Brainshare conference. In its reincarnation as an open source-focused company, its Linux business never quite worked properly, and CEO Ron Hovsepian has attributed recent rocky performance to the company's Linux business.

Some of the early forecasts for what will happen if Novell is swallowed up are already in. Of course, everyone feels that Red Hat will benefit big time, and possibly Microsoft (although Microsoft is actually a Novell partner). But I'm in agreement with Matt Asay that the reality of what may lie ahead could be more complicated. Matt has written many times that Novell's parts are worth more than the whole is valued at, and Elliott Associates pretty much said the same thing in its offer letter for the company:

"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."

As Asay notes in his column today, Elliott Associates is more likely to flip divisions of Novell to interested buyers than it is to oversee a long-term strategy for the company as it stands. Novell's Linux business is most likely to be flipped first. At that point, companies ranging from Oracle, to VMware to IBM could be buyers, but smaller players could be too.

Novell's foibles with its Linux business won't necessarily extend to whichever company ends up with it. Red Hat has made a mint focusing almost exclusively on service and support for Linux, and is moving aggressively into virtualization, cloud computing strategies and more. It's not too late for Novell's Linux business to spread out to new territory as well, but it looks very likely that Novell itself won't be steering that business toward new, uncharted territory.