good article on todays action
Novell Continues to Rise on Takeover Talk
By MYLENE MANGALINDAN
c.1997 Bloomberg News
Novell Inc. shares rose for a second day amid speculation that International Business Machines Corp. might buy the maker of network software.
The shares were up 31/32 to 9 31/32 in trading of 31.4 million, making it the most active stock in U.S. trading. The stock was up 5/8 on Monday, giving it almost a 20 percent gain in the two days.
The acquisition of Provo, Utah-based Novell would give IBM new customers in the small and medium-sized business market, where it could sell software products and services such as Lotus Notes ``groupware,'' in addition to hardware such as servers for smaller networks, some analysts said. Novell would gain the marketing power of Big Blue, which helped push up sales of Lotus Notes when it acquired the company, analysts said.
``The last I heard was a rumored buy,'' said Eric Ryback, whose Ryback Management Corp. owned more than 8 million shares of Novell in March.
IBM spokesman Fred McNeese declined to comment, saying the Armonk, New York-based company doesn't discuss market speculation or rumors. Novell spokeswoman Julie Hatchett declined to comment on the stock activity and speculation.
IBM and Novell have worked together since the beginning of the 1990s to develop software that connects IBM mainframes with Novell networking software, said Jonathan Cohen, a Novell spokesman. Currently, Novell is working with IBM to integrate its directory technology with IBM Unix and OS/2 operating systems, he said.
IBM sells two primary networking software products, Lotus Notes, which allow users to share documents, and Tivoli Management software, which manages information on big servers and mainframe computers. Novell has products that compete with IBM in those areas called Group Wise and ManageWise.
IBM probably would be interested in Novell's Directory Services, which lists all of a network's users and files and controls user access to data, said Richard Villars, an analyst at International Data Corp.
``It's a very complex system because you have to distribute information across boundaries,'' Villars said. ``If you can successfully employ that, it can result in reduced costs of managing systems'' that combine local office networks, nationwide corporate networks and the Internet.
In an acquisition IBM also would gain access to Novell's large customer base, about 40 million for Netware alone. The company is still the market leader in networking software, with about a 57 percent share, said Therese Murphy, an analyst at Smith Barney.
While an IBM-Novell partnership would make sense, those close to the company are skeptical.
``I don't believe the rumors I'm hearing.'' said Ralph Yarro, general manager of Noorda Family Trust Ventures, which is run by Ray Noorda, the 73-year-old founder of Novell. Noorda is still Novell's largest shareholder, owning 7 percent, or 26 million shares, though he holds no posts in the company. The Noorda Family Trust has investments in 22 companies whose products enhance or support Novell.
``We're not hearing anything from the people who are in the know,'' Yarro said. ``We're pretty confident it's just a rumor.'' He said Chairman and Chief Executive Eric Schmidt, who joined the company in March from Sun Microsystems Inc., ``wants to make a go at it. I think he's in for the long haul.''
Ryback, who is the fourth-largest shareholder, said Novell looks promising for a number of reasons. ``They've cleaned house, have $1 billion in cash, and they've put a lot of things behind them.''
Analyst Axxel Knutson of Montrose Capital Management raised his rating to ``strong buy'' from ``buy'' because the company has a strong balance sheet, is making changes to fix mistakes and has the potential to achieve higher earnings, he said.
The company had too much older inventory that customers didn't want, with a work force and executive staff that were too big for a company its size, analysts said. Two months after Schmidt joined the company, about 30 percent of Novell's executives left, were fired or demoted to positions below vice president level. Last quarter, the company cut 18 percent of its work force to about 4,800.
``Novell has the potential for some very significant earnings down the road,'' Knutson said. ``That's the kind of company we like to own, even if it's foggy down the road.'' He said Novell shares could reach $50 within four years.
In the past year, Novell shares have fallen about 9 percent, even as the Nasdaq Composite Index rose about 23 percent. The company has lost market share steadily to Microsoft Corp.'s Windows NT, which small businesses favored over Novell's older products.
``The megatrend has been that Microsoft has made it very tough,'' said Robert Finch, a money manager specializing in computer stocks at $38-billion Aeltus Investment Management in Hartford, Connecticut.
``Six years ago, if you were going to say you wanted to invest in companies that are in the center of that space, Novell would have been on that list. In the past six years, Novell has dropped off that list.''
Analysts, money managers and others are split about the possibility of an IBM-Novell acquisition. Knutson said he didn't give the rumors any credence.
``We think this rumor with IBM is ridiculous,'' he said. ``I can't imagine Novell going through all the trouble of a buyout, not after they finally figured out how to fix the company.''
Talk of a Novell buyout has circulated for years, said Charles Payne, who runs Wall Street Strategies, a research firm focusing on companies that could be takeover targets. ``Novell has been around a long time.'' Novell is valuable because the company ``had enormous exposure . . . in corporations,'' but its products could connect only a limited number of computers in a company's local area network, said Lary Aasheim, a technology money manager at $17-billion CoreStates Investment Advisers.
``IBM would only be interested as a strategic buyer, if they thought there was a kernel of software, or perhaps they had something in video servers,'' Finch said. ``IBM could conceptually be interested, in that IBM is interested in improving the network capability of computers and how they play in a client-server environment.''
What many investors do not know is ``how strong the advanced technology is at Novell,'' Finch said. ``We know that Schmidt is a brilliant guy, and he's going to put some direction into their products.'' Aasheim said the acquisition is possible but doesn't seem to make sense. IBM has plenty of cash on its balance sheet, although the $3.5 billion it would take to buy all Novell's shares today on the open market isn't petty cash, he said.
``The only thing growing on a revenue basis for IBM is the service business, which is growing 25 percent-plus, but on the other hand, Novell isn't growing either,'' Aasheim said. ``So I'm not sure it adds much growth potential. It doesn't seem to make sense to me in terms of adding growth.''
Payne said his firm issued a ``buy'' report on Novell last week.
IBM, the world's largest computer company, fell 1 11/16 to 103 5/16 in trading of 2.99 million. |
