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The End of Novell

In March of this year, the hedge fund Elliott Associates offered to buy Novell for approximately $2 billion. This set into motion a number of processes, one of which led to the news that Novell had agreed to be acquired by Attachmate for a slight bump over the original valuation. Andy Updegrove has the most detailed dissection of the transaction I’ve seen, for those interested in the deal mechanics.

Assuming the sale proceeds, the implications are many because Novell’s portfolio is broad. The concerns we’re primarily asked about, however, center around two assets: SUSE and Novell’s intellectual property.

SUSE was originally obtained by Novell via acquisition in 2003. Though it has been largely overshadowed by Red Hat from a public perception standpoint, SUSE was the de facto alternative for commercial Linux implementations through the beginning of this year.

This role has substantially eroded following the news of Elliott’s offer, however. The market has already largely reacted to the pending sale, in fact. Canonical, the commercial sponsor of the rival Ubuntu distribution, is pointing to recent Netcraft surveys as validation of its claims of strong customer growth over the past three quarters. Approximately the same timeframe as the news that Novell was being shopped, in other words. Although correlation does not prove causation, it is likely that Ubtunu’s growth is coming at least in part at SUSE’s expense.

Novell’s partners, likewise, have already hedged themselves in anticipation of a new home for the SUSE asset. IBM, for example, has been conducting webinars with the aformentioned Canonical. While IBM has supported Ubuntu previously, support centered around the desktop. The recent server level engagements can be read as a direct consequence of the uncertainty around the future of SUSE.

Rumors originally had VMware as a likely destination for Novell’s Linux assets, a home that IBM and others might be less than happy with. What remains to be seen is whether Attachmate will prove more favorable, either for partners or customers. Initial reactions have been less than favorable, an attitude not improved by a general unfamiliarity with Attachmate.

The future of SUSE, then, remains uncertain. It maintains substantial commercial account penetration, and the acquisition may resolve questions about the long term viability of its corporate parent. On the other hand, it is possible that while the uncertainty stemmed SUSE adoption it also forestalled migration. Current customers may have been waiting for definitive information on SUSE’s new home before deciding whether to proceed with migration; we received inquiries on the viability of Debian and Ubuntu the day the news of the acquisition closed. Attachmate may be viewed as less threatening to potential partners than an industry player like VMware, but this neutrality is less encouraging to customers and developers alike. At a minimum, the two parties will be scrutinized by shareholders contemplating class action litigation.

The next two quarters should tell us much about SUSE’s future role in the commercial Linux distribution landscape.

Of far greater concern to some, however, is Novell’s intellectual property portfolio. As has been well documented, as part of the transaction Novell sold some 882 patents to CPTN Holdings, a consortium that counts Microsoft as a member (more on them here), for $450 million dollars. Although Novell subsequently disclosed that it was retaining its Unix copyrights, this does not satisfy fears regarding the patents. Copyrights, remember, refer simply to a given codebase, while patents refer to the idea or invention behind them. It’s entirely possible, then, that Novell could retain the copyrights to code as Microsoft simultaneously acquired patents that read on same. Questions, therefore, remain: what – specifically – was the intellectual property acquired? More importantly, what’s the intent of purchase: are they being purchased for offensive or defensive purposes? It’s admittedly speculative to extract intent merely from Microsoft’s recent history with respect to intellectual property licensing and litigation, but in the absence of other information this reaction is natural.

Even the cost of the asset is curious. At $450 million, the IP is clearly viewed as material: that’s almost the cost of one Azure datacenter, in Microsoft terms. But if the IP potentially reads on open source projects like Linux or Open Office, let alone commercial products like Microsoft Office, even this valuation is far too low, assuming an open sale. The lack of evident external interest in the IP has certainly raised eyebrows. One explanation for this apparent apathy might lie in the OIN licensing. Novell, you’ll recall, was a member of the consortium whose purpose is to ensure royalty free licensing and patent non-assertion for “Linux and Linux-related systems and applications.” If said licenses terminated upon sale, the motivation for OIN members such as IBM and Red Hat or licensees such as Canonical, Google or Oracle to involve themselves in the bidding process might be substantially higher. According to the OIN’s Keith Bergelt, however, “ALL obligations remain in place. So, all OIN licensees at the time of transaction close will have access to Novell’s patents through a cross license under the terms of the OIN license.” As an aside, it’s interesting to speculate on what impact, if any, this had on the value of Novell’s assets at the time of sale, and whether any hypothetical asset devaluation may have been previously offset with prior cash incentives.

Though it’s attracted less attention than other recent merger and acquisition rumors, then, it’s entirely possible that the Novell transaction has a more profound impact on the industry than the far more controversial Oracle/Sun transaction. Such is the unfortunate ability of patents to have broadly overreaching – and unpredictable – consequences. Given the length of the sale, the idea that Novell’s partners and the wider Linux ecosystem isn’t familiar to a greater degree than the public with the nature of the assets sold isn’t plausible. Which just returns us to the original question: what did Microsoft and its fellow consortium members pay approximately half a billion dollars for, and why?

Like the rest of the public, we look forward to answers on these questions in the months ahead.

Disclosure: Canonical, IBM, Microsoft, and Red Hat are all RedMonk customers, while Google, Novell and Oracle are not.

Categories: Linux, M&A Announcements, patents.

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