Novell “potential” sale and its implications for infrastructure startups

As has been widely reported in tech and financial press, the once mighty networking and infrastructure company Novell has been offered to be taken private by hedge fund Elliot Associates for about $2bil. The company’s board has rejected the offer, but the company is still open to a sale among other alternatives such as recapitalization, strategic ventures or sales of some assets. This is not shocking news, because Novell has been struggling to define sustainable business growth strategies.

Novell is iconic as the “network software” company, and I remember well its titanic struggle with Microsoft in the 90s. While it ultimately lost out to the Redmond behemoth, it was for a while a leading light, an example of how other companies can and should take on Microsoft’s monopoly.

Although the board has stated that the offer undervalues the company’s franchise and its growth potential, the fact the Elliot Associates already offered a hefty premium to the stock price at the moment of the announcement, the board has to seriously consider its alternatives, including:

  – Finding a white knight: another technology company that will buy Novell or a major part of it at a higher price than Elliot’s offer.

  – Presenting a business plan that show with substantial evidence that the company has a strategy to improve its shareholders’ value

  – Negotiate with Elliot Associates to extract a higher price and eventually sell the company off.

Given those alternatives, regardless of the final outcome, Novell will most likely have to shed off a large portion of its very diverse set of businesses and that will open up a lot of opportunities for start ups and expansion stage companies to step in a capitalize on these changes in their market.

From my perspective, here are the area of opportunities:

– The collaboration software tools are likely to be sold off, as it has plenty of competition in both enterprise software and at the lower end. Maybe someone will pick this up and incorporate it into their product suite – for example, Corel Corporation.

– The identity management business will be in a very interesting position. Novell still has one of the most advanced technology platform in this area, and its IP will be prized by other network management or infrastructure companies. Maybe Citrix or Cisco might want to pick it up. However, it might also lead to a flowering of startups founded by former employees of the company, starting out to capitalize on the void in the market.

– The virtualization and data server management businesses represent another interesting area. With the resurgence of data centers (with at least two upcoming IPOs ) and increased demand for data centers all across the world, this will be a growth area in the near future.

The acquisition might also trigger a wave of consolidation among older software vendors such as CA, Citrix or Quest, as these companies face similar pressure to improve their shareholders values. They might be come more acquisitive and look to acquire more expansion stage companies to improve their top line, or look into investing into the areas listed above where Novell is no longer a big presence.

It has been a ride full of up and down for Novell. It also represents a very audacious bet by a hedge fund, and show that old, staid technology companies are not safe to hostile takeovers in the world today, especially if they are not reinventing themselves and demonstrate successful business growth strategies.

It will be very important to follow the outcome of this – for investment prospects as well as for a history lesson in the rise and fall of great technology companies.