Rumors & Rants: Novell, An Attractive Takeover Target?
(Don't know if previously published, JD)
By Steve Harmon
Senior Investment Analyst
Internet.com
"Where Wall Street Meets The Web"
[August 28, 1997] Novell CEO Eric Schmidt downplayed rumors that the network software
firm is up for sale, saying "Novell is not for sale."
Well, with $1.1 billion cash on hand, a depressed stock price relative to its peers, and an
installed base of users north of 50 million worldwide, TCP/IP functionality, a hot directory
service, a guru from Javaland at the helm, we got news: Novell's for sale, or at least on the
radar of every major software firm on the planet with an acquisitive desire.
First reports of a rumored deal surfaced in the trade press that IBM was the suitor of choice,
but we don't think so. IBM bets on Lotus Domino and Notes. The buzz still pushed NOVL
shares up 11% Tuesday to $9.96875 per share on heavy breathing for those who've watched
NOVL sputter the past two years.
NOVL shares dropped $59.375 to $9.375 per share Wednesday after Schmidt's comment.
A better choice? Schmidt's old stomping ground, Sun Microsystems (NASDAQ:SUNW).
Here's the strategy: Install your leading technology officer at a fumbling but large network
software firm, trim the fat, focus on Java and TCP/IP, and then bring the company in as Sun's
new networking king in a box software division. Voil .
Our look at the balance sheet shows why NOVL may be attractive for two reasons: Any
acquired inherits $3.27 per share in working capital, softening the acquisition considerably. It
also takes some of the bromide out of NOVL's fiscal third quarter results that left a lot to be
desired; $90 million revenue vs. $365 million for the same quarter last year. Third quarter
losses reached $121.65 million, including a $55 million charge for 1,000 layoffs.
Network Is The Network
Novell
Valuation Estimates
NOVL
Shares outstanding
349.38
x Aug 27 share price
$ 9.38
= Market capitalization
$ 3,275.45
- Working capital
$ 1,143.39
= Enterprise value
$ 2,132.06
Working capital per share
$ 3.27
Sales and Income/Loss
3Q 1997 ending July 31 revenue
$ 90.07
3Q 1997 ending July 31 loss
$ (121.65)
Loss per share
$ (0.35)
9 mos. Ending July 31, 1997 revenue
$ 738.03
9 mos. Ending July 31, 1997 loss
$ (194.44)
Loss per share
$ (0.25)
Projected fiscal 1997 revenue
$ 865.00
Projected fiscal 1997 LPS (loss per share)
$ (0.20)
Revenue Multiples
Market capitalization/1997 revenue
3.8
Enterprise/1997 revenue
2.5
Vs. Web software average 4x to 5x revenue
NOVL per share @ 4x
$ 9.90
NOVL per share @ 5x
$ 12.38
Note: All figures in millions except share price
EPS and multiples; ( ) = loss
Not to say Novell has all the right moves. Its losses are huge and revenue looks like it's in
transition from old world to new, from proprietary to open, Netware to Java. Risk exists as
valuable time is lost in the Web software space to rivals such as Microsoft
(NASDAQ:MSFT), with its OS/2-turned Windows NT software (yes, NT was based on
IBM's OS/2, which Microsoft helped develop, how's that for irony with IBM rumored to be
interested in Novell?).
Other challenges exist in the unproven Java software platform, and Schmidt's limited
experience as CEO/chairman--he's more technology-based. And even with Schmidt, which
we think is a great move by Novell, the leadership must go deeper than one guy. Can Novell
make its elephant into a jaguar with Java? Those are the reasons why a Novell-Sun deal
sounds good. The network is the deal. |
