Novell Stock Falls on Doubts About Sun Merger

Shares of Novell fell today after analysts rushed to downplay the likelihood that the company would be bought by Sun Microsystems (Nasdaq: JAVA).

The potential power play, floated by Sun CEO Jonathan Schwartz in interviews with the Wall Street Journal and other publications, would position Sun in the Linux space by giving it control of SuSE Linux.

That in turn would put Sun rival IBM (NYSE: IBM) in a bind. IBM has a strong alliance with SuSE, one that was strengthened further by Novell’s US$210 million purchase of SuSE last year. IBM helped Novell make that acquisition by providing $50 million in cash.

Merger Considered Unlikely

Novell has not commented on the possible takeover. Sun has attempted to downplay the possibility, though in a statement it did mention that it remains well positioned to act strategically and cited a cash stockpile that has grown to more than $7.5 billion.

Based on Novell’s current market cap, acquiring the company would probably cost in the neighborhood of $3 billion.

Quick to downplay the likelihood of such a merger happening -- or being beneficial for Sun or its customers -- most analysts saw Schwartz’s comments as a way to draw attention to Sun’s Solaris operating system and its compatibility with Linux. The analysts also noted that the statements were timed to coincide with the beginning of a major Linux trade show.

Initially, the news sparked interest in the stock of both companies. Novell shares were up more than 6 percent during the trading day Monday, closing at $7.27. Sun stock rose just a penny to $3.96. Novell slumped in morning trading Tuesday, falling more than 2.4 percent to $7.09. Sun shares were also down more than 1 percent to $3.89.

In the Blogosphere

In his blog Schwartz suggests that IBM has nearly "lost control of the social movement they were hoping to monetize" in Linux because most enterprise deployments are occurring on Red Hat (NYSE: RHT).

"With Red Hat running on the majority of IBM's proprietary hardware, Red Hat can now direct those customers to HP (NYSE: HPQ) and Dell (Nasdaq: DELL). Even Sun," Schwartz wrote. "IBM is in a real pickle. Red Hat's dominance leaves IBM almost entirely dependent upon SuSE [and] Novell. Whoever owns Novell controls the OS on which IBM's future depends. Now that's an interesting thought, isn't it?"

He goes on to tout Sun’s ability to leverage its Solaris platform to run different types of software.

Gartner (NYSE: IT) analyst John Enck told the E-Commerce Times that Novell has had some success in pressuring Red Hat to be more flexible in terms of pricing. And with IBM and Hewlett-Packard backing SuSE, Novell has some strong allies in the Linux-on-the-desktop push.

Enck believes that most large server vendors will opt for flexibility and choice for their customers, offering machines that run either SuSE or Red Hat. "The battle will be a long one, and [it will] be fought over price and services and other features," Enck said.

The Spin Room

Other analysts said that IBM has a good relationship with Red Hat and is less worried than Schwartz suggests about which Linux vendor a customer chooses. A Sun acquisition of Novell would likely be more trouble than it's worth, the analysts add, because the two already have overlapping customer bases and few true synergies exist.

Sun has moved to become more of a software and services company than a hardware-only vendor, and it has made some smaller acquisitions to further that cause.

Red Monk analyst Stephen O'Grady said the probability of such a deal being consummated is low, but that Sun may be interested in pursuing the deal for defensive rather than offensive purposes.

Sun may be worried, O’Grady added, about the possibility that the Novell-sponsored Project Mono will be a threat to Java in the long run. He added that the basic premise of Schwartz’s thesis is up for debate.

He sees the comments more as a "verbal exercise" designed to "poke IBM, reassert Sun's disruptive potential and highlight Sun's balance sheet." By that measure, Schwartz may already have achieved his goals.

"He's going to get people talking about Sun, no doubt about that," O’Grady said.