November 4, 2003 8:14 AM PST

Novell to acquire SuSE Linux

The balance of Linux power shifted Tuesday, with Novell announcing an IBM-assisted plan to acquire SuSE Linux.

Longtime Microsoft foe Novell has signed an agreement to acquire SuSE Linux for $210 million in cash, while IBM, the most powerful backer of the Linux operating system, will make a $50 million investment in Novell.

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What's new:
Novell agrees to buy SuSE Linux for $210 million in cash, and IBM plans a $50 million investment in Novell.

Bottom line:
The deals promise to dramatically alter the Linux landscape, boosting the fortunes of No. 2 SuSE, increasing the competitive pressure on No. 1 Red Hat and providing a new direction for Novell's rivalry with Microsoft.

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The moves, announced Tuesday, could boost the fortunes of SuSE, the No. 2 seller of Linux, increase the competitive pressure on No. 1 Red Hat and provide a new direction for Novell's rivalry with Microsoft.

The three-way action also highlights where much of the power in the Linux realm resides. "IBM was a very important broker in the deal. It's prepared to be the kingmaker to counterbalance SuSE against Red Hat," RedMonk analyst James Governor said.

The SuSE deal is the second Linux acquisition for the Provo, Utah-based company, which bought desktop Linux software specialist Ximian in August. Though Ximian gave Novell a grip on software that's designed for using Linux on desktop computers, SuSE is strongest with the open-source software on servers, the networked machines that handle chores such as hosting Web sites and routing e-mail.

"Novell has a pretty dismal record in expanding beyond their original roots, but with Ximian and now this, they're certainly positioned to become a major competitor to Red Hat," Illuminata analyst Gordon Haff said.

Although Novell has had trouble with major changes such as these, Haff added, "the fact that IBM does have involvement here and obviously cares deeply what comes of SuSE could help steer Novell in the right direction."

Investors welcomed Novell's move. In midday trading, its shares were up 37 percent to $8.31, and shares of the SCO Group were up 14 percent to $18.30. Red Hat's stock, meanwhile, was down 9 percent to $14.

Although the acquisition boosts software that competes directly with Microsoft, Novell and SuSE executives insisted that their target is Red Hat. "Together, we are an effective competitor to the current No. 1 company in Linux," Novell Chief Executive Jack Messman said in a conference call Tuesday.

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SuSE will contribute $35 million to $40 million annually to Novell's revenue and 399 employees to its business, Messman said. The acquisition is expected to leave profits unchanged in fiscal 2004 and then boost them afterward, he said.

The acquisition is expected to close by the end of Novell's first fiscal quarter in January, at which point the IBM investment will become effective, Novell said. IBM plans to buy $50 million of Novell preferred stock.

Big Blue made the investment to help "assure IBM's customers that there will be strong, continued support for SuSE Linux" across its server line and server software products," spokesman Mike Darcy said. Pricing terms of the IBM investment haven't been settled, but Big Blue's stake is expected to be "in the 2 percent range," Messman said.

In addition, IBM and Novell are negotiating an extension to SuSE's agreement to support all four of IBM's server lines and are planning a joint marketing and support relationship, the companies said.

New possibilities
In one fell swoop, the moves dramatically alter the Linux landscape:

• It joins SuSE's partnerships and considerable influence in the Linux market with Novell's sales network, customer base and cash. On July 31, Novell had $739 million in cash and marketable securities.

• It gives Novell a second chance to take on Microsoft, applying the lessons it learned a decade ago, when its NetWare operating system for servers lost out to Windows--and this time, Novell will also be able to sell an operating system for desktop computers. Microsoft already has Linux in its crosshairs.

• It could reshape the dispute between Unix owner SCO and its two legal adversaries, IBM and leading Linux seller Red Hat. Novell--a company that has retained significant rights from its former ownership of Unix--now has a strong vested interest in Linux. SuSE, meanwhile, believes that its former alliance with SCO shields it, an assertion SCO denies.

• It puts competitive pressure on Red Hat by giving Nuremberg, Germany-based SuSE better access to buyers in the United States, the world's biggest technology market and Red Hat's stronghold.

• It could accelerate changes in Novell and SuSE's product plans, including SuSE's transformation from a seller of operating systems to a seller of higher-level server software and Novell's move from NetWare to Linux as a foundation for its software.

Novell may end up with SuSE, but it wasn't the only potential candidate. RedMonk's Governor said he learned that SuSE had proposed that Sun Microsystems buy the company, but Sun rejected the offer. Sun was not immediately available for comment.

Although Novell and SuSE plan some changes, much will remain constant, Novell said.

Novell Vice Chairman Chris Stone and Chief Technology Officer Alan Nugent will oversee the Linux work, spokesman Bruce Lowry said.

The role of SuSE Chief Executive Richard Seibt isn't yet clear, but Lowry said Seibt has indicated that he plans to stay with Novell. "We expect many SuSE executives will remain and continue their work with SuSE Linux as a part of the Novell management team," Lowry said.

In the conference call, Seibt offered his "full commitment in making the integration happen and making the joint company successful" but didn't say whether he'd stay in the long term.

It's too early to say whether SuSE staff will lose jobs, Lowry said. Staff from the two companies don't overlap much beyond some areas in administration and finance, he said.

SuSE's development work will stay in Germany, though Novell plans to "cross-pollinate" SuSE and Novell engineering, Lowry said. Novell will maintain the SuSE brand.

The cultural and geographic distance between the two companies will be difficult to overcome, Governor said. "German-U.S. integration is one of the hardest problems in business. Just look at DaimlerChrysler," he said.

Disdain for SCO's lawsuit
SCO and Novell have been tangling over Linux since SCO launched a legal attack that accused IBM of moving Unix technology into Linux against the terms of its contract with SCO. Novell's public involvement began in May, when the company asserted that it never sold Unix copyrights to SCO, then backed off when SCO unearthed a contract amendment that showed otherwise.

The SuSE acquisition plan indicates that Novell and IBM are unfazed by SCO's position, said Mark Radcliffe, an intellectual property attorney for Gray Cary who has monitored the SCO legal machinations.

"It shows a deep skepticism, if not outright disdain, for the SCO claims," Radcliffe said. "Or else they wouldn't be spending this amount of money."

In particular, the acquisition plan could indicate that IBM has faith in a provision that Radcliffe termed a "silver bullet" in the 1995 Asset Purchase Agreement, under which Novell sold Unix to SCO Group's predecessor. Under that provision, Novell is permitted to waive potential violations of the Unix license agreements that were in effect when it sold Unix, and Novell invoked the right in the IBM case against SCO.

"Maybe (IBM) believes its silver bullet is actually a platinum bullet. If you spend a lot of money, you obviously have a lot of confidence in that part of the situation," Radcliffe said.

SCO sees things from the opposite side. Tuesday's deal means that IBM and Novell "are willing to take on a great deal of risk," spokesman Blake Stowell said. "The intellectual property issues in Linux are controversial and unsettled, and it appears it may be that way for a very long time."

Messman said Novell is considering whether to offer Linux customers legal indemnification to protect them against SCO legal actions, though customers aren't crying out for the move. Beyond that, he reiterated the company's earlier position: "Novell continues to call on SCO to make public the basis of its claims of Linux infringement of Unix."

Other factors are involved in the IBM-Novell-SuSE relationship, however.

For example, SuSE has long supported Linux on Big Blue's in-house server designs, Governor said. "At the moment, IBM needs SuSE."

IBM's iSeries midrange servers and zSeries mainframes are updated every six months, and the company needs to ensure that Linux keeps pace. Big Blue "faced a stark choice--put some money in, or think about delivering its own distribution" of Linux, Governor said.

In addition, IBM, Novell and SuSE are all happy to compete against Microsoft. "What's good for Linux is bad for Microsoft," Haff said, and Tuesday's deal has the potential to "further erect fences around Windows."

Governor believes that Novell's intent is to compete with Microsoft on the Redmond, Wash.-based company's stronghold.

"IBM has been reluctant to step up to the plate when it came to customer calls for a client-side open-source strategy," he said. "It looks like Novell is trying to reinvent itself with a strategy in exactly that direction."

 

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