NOVL Holders rejoice!
Industry Analysis
Mar 09, 1999
Computers:Is H-P Readying a Bid for Novell?
Director of Online Research: David Sterman
Is Novell (NASDAQ:NOVL - news) the latest improbable takeover candidate?
Yes. And our bet is that it will hook up with Hewlett-Packard (NYSE:HWP - news) , which is currently planning a wrenching upheaval that will cleave the company in two.
An HP-Novell deal certainly makes plenty of sense. 'Both companies have similar visions on the technological front,' says a source who asked to remain unnamed, adding that 'the two companies are quite friendly.'
Just last week, HP announced that it will break the company into a pair of distinct units: the company's $7 billion test-and-measurement business, and its core computer business, which could be perceived as a pure play on that new technology known as the Internet.
To the surprise of virtually every follower of technology stocks, HP somehow managed to miss the whole Internet revolution. Five years ago, many argue, HP was a shoo-in to capture a big chunk of the burgeoning web opportunity. The company's engineers had a proven knack for developing cutting edge hardware and software. Somehow, under CEO Lew Platt, the company lost its way.
Look at what happened in the tech world while HP was sleeping: Dell (NASDAQ:DELL - news) reinvented the PC distribution industry with its world-beating manufacturing processes. Sun Microsystems (NASDAQ:SUNW - news) took the net by storm with its platform-independent Java software. Compaq (NYSE:CPQ - news) significantly bolstered its presence in the high-end market through its purchase of Digital Equipment. Even lumbering IBM (NYSE:IBM - news) got it together, as the company is now the dominant force in the still-nascent, but fast-growing e-commerce sector.
In early October, Sun Microsystems started running a series of ads touting itself as 'Sun.com.' Since then, the company's shares have risen from $40 to $104.
HP would love to emulate that move. This morning, the Wall Street Journal reported that HP is about to kick off a $150 million ad campaign that will position the company as an Internet force. The company has even coined a catchy new phrase that captures the new strategy: e-services.
But to get from here to there, HP needs to play catch-up--and fast. To do so through the just-announced reorganization would be quite risky. By the time HP finally reinvigorates its internal engineering focus, nimble competitors will have moved on to the next round. Enter Novell.
Although the software company's $1.1 billion in annual sales is a mere fraction of the sales base of arch-rival Microsoft (NASDAQ:MSFT - news) , which had $14.5 billion in sales, Novell's product pipeline is bulging with software projects that target the Internet. More specifically, Novell's focus under new CEO Eric Schmidt, has been on capturing a decent-sized slice of the coming market for products that tightly integrate the Internet with corporate networks.
A raving review of Novell in this past weekend's Barron's entitled 'Novell.com,' highlighted the company's emerging strategic shift. 'What Novell has created is essentially an Internet operating system, and a really good one at that,' Flag Investors Communications Fund's Liam Burke told Barron's.
Indeed, Novell's broad slate of Internet-focused software products was one of the major reasons that Individual Investor selected Novell as a Magic 25 stock this year. If investors are excited about what the company is doing now, just wait until you see what the second half of 1999 brings.
Before HP agrees to buy Novell, though, a number of hurdles must be vaulted.
1) If Novell's future is so bright, investors are no doubt going to expect a huge premium. Though the company's shares have doubled since Schmidt's arrival, he has set his sights much higher. Barron's posited that the stock could zoom from the current $20 to nearly $80 later this year. More likely, Novell shareholders would be grateful to be taken out at $40. That $13.5 billion price tag would likely be an exchange of stock since HP only has $4 billion in the til. That price would not badly dilute HP shareholders since the company's market cap exceeds $70 billion.
2) Eric Schmidt, who left his #2 slot at Sun to become #1 at Novell, isn't inclined to take a back seat again. The 43 year-old has tasted the power of control, and by all accounts, loves it. Though he's worked his butt off to whip Novell back into shape, he's a little young to think about retirement. Fortunately, HP's Lew Platt has announced plans to retire imminently. Ladies and gentleman, the new CEO of Hewlett-Packard: Eric Schmidt.
3) HP managers will be too busy preparing for the impending business split to integrate a new business. This business is moving on Internet time. Any HP insiders who complain of moving too hastily will likely be shown the door.
Bottom Line:
Takeover rumors are often just that: Rumors. Just a few months ago, shares of Novell were juiced when IBM was reportedly looking at the firm. There's no reason to believe the rumors have any more validity this time around. Except that the deal just makes sense. A combined HP-Novell would quickly emerge as one of the dominant providers of hardware and software.
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