NOVL an even better bargain than I thought. $7 in cash and assets, stock at $11, spinoffs coming soon.Schmidt starts spin cycle for Novell
By Om Malik
Redherring.com, August 16, 2000
Sometimes breaking up is the only thing to do. At least that appears to be the best option left for Novell (Nasdaq: NOVL), the erstwhile king of the networking universe.
With its stock price languishing and the company sales force struggling to regain momentum for its core Netware infrastructure, the Provo, Utah-based Novell is looking at spinning off some of its divisions as separate companies, sources close to the company say.
Even as spin-off options are being explored, Novell's shares rose 20 percent, or about $1.81 a share, to $11 a share on Monday, after struggling in the single digits for nearly three months. Driving up the stock price were persistent rumors on Wall Street that IBM (NYSE: IBM) was interested in buying Novell. Novell spokesperson Raymond Nasr dismissed this as nothing but a "market rumor."
Among the first divisions to be spun off, sources familiar with Novell say, is the Net Content group, which has been focusing on content distribution software including the Novell Internet Caching System (ICS). ICS licenses its software to the likes of Compaq (NYSE: CPQ) and Dell Computer (Nasdaq: DELL) and other companies that sell hardware bundled with Novell ICS software, which, according to independent estimates, has cornered nearly 40 percent of the market.
THE LINEUP
Even though Novell categorically denies any such move, the announcement of the spin-off could come as soon as Wednesday, when Novell releases its fiscal third-quarter earnings after the closing bell. Novell is expected to earn 2 cents a share this quarter, according to First Call, down from 14 cents a share in the same quarter a year earlier.
Sources close to the company said that the next spin-off would likely be Novell's Network Directory Services division, which is comprised largely of products like NDS e-Directory. Another eventual spin-off could be the Netware group. But Mr. Nasr dismissed these suggestions as "market speculation."
Those familiar with recent moves in the company say that the investor community is leaning heavily on Novell to explore options to boost its stock price, with spin-offs being at the top of the list. Earlier this year, at a Morgan Stanley Dean Witter Technology conference, Novell hosted a private dinner for large institutional investors and first floated the idea of a carve-out or spin-off of some of its Internet-related divisions.
At the time, the institutional investors were mightily impressed with CEO Eric Schmidt's turnaround effort -- Novell stock was trading in the high $30s, and any talk of breaking up the company was given a cold shoulder by these doyens of Wall Street.
However, Novell missed earnings estimates in the second fiscal quarter due to slowing sales in its Netware division. That move sent the stock tumbling, and the very same large investors have since changed their tune. One New York-based hedge-fund manager, speaking on condition of anonymity, said he is exasperated with the company. Until recently the manager was a holder of more than a million shares of Novell stock, but he said he has been slowly "lightening his position" after taking a big loss as Novell's share price plummeted.
TAPPING THEIR FEET
Institutional investors who have lost patience with the company would welcome any spin-offs. Brian Barish, president of Denver-based money management firm Cambiar Investors, is one of many who have been disappointed by Novell's recent stock price. Having held the stock since 1997, Mr. Barish says that the market is telling Novell management to take some corrective action.
Mr. Barish estimates that Novell's cash in hand and other assets (including some venture capital investments) translate into about $7 a share. Before the Monday rally, the stock was trading at $9 a share, so the market was according only $2-per-share value to Novell's existing business. "What the market is basically saying is that at this price they are not a viable company," says Mr. Barish. A long-time supporter of Novell, he thinks it is time for some drastic action.
Just spinning off the ICS business will be a major boost to Novell. For instance, Cacheflow (Nasdaq: CFLO), one of Novell's rivals in the cache appliance market, is trading at about 100 times fiscal-year 2002 earnings estimates of 83 cents a share. In comparison, Novell can be had for just 30 times fiscal-year 2001 earnings estimates of 37 cents a share.
In May, Novell already had reorganized its operations around three core product categories -- appliances, directory services, and Netware -- and a fourth division was organized to focus on customer services, consulting, and support services. While Netware is a highly profitable legacy business, the future growth for the company is expected from the Internet-focused divisions, which include the ICS and directory services divisions.
"It is likely to be difficult for Novell to survive as an independent player, as they are in the process of morphing their core business model from a network operating system focus to a network management services focus, and from a software-as-product focus to a software-as-service focus," says Anil Gupta, professor of strategy and global e-business at the Robert H. Smith School of Business at the University of Maryland.
STRENGTH AS WEAKNESS
According to Mr. Gupta, life is tougher for Novell because they have a history of being technology- and product-centric rather than market-centric. The company's CEO, Eric Schmidt, comes from a technology rather than marketing background. Mr. Schmidt was hired in 1997 from Sun Microsystems, where he was the chief technology officer.
Under Mr. Schmidt's tenure, Novell has transformed itself from a maker of a shrink-wrapped network operating system to a purveyor of very sophisticated Internet technologies. But Novell has not been able to capitalize completely on these new technologies, and as a result the stock market has continued to view the company more as the maker of Netware -- software whose time may have come and gone.
Mr. Barish could not agree more. "Novell is the Philip Morris of the technology business -- the market is worried about the slowing Netware business, and spinning off other divisions (like appliances) might unlock unrealized value," he says. He thinks Novell is worth more than $25 a share. |
