November 3, 2005 1:48 PM PST

Hovsepian now heir apparent at Novell

Ron Hovsepian, promoted to president and chief operating officer of Novell on Tuesday, is likely to replace Jack Messman as chief executive as well, according to a regulatory filing published on Thursday.

The server software company revealed the information in a disclosure that its board on Monday amended the agreement that defines Hovsepian's severance benefits. The change describes new benefits he'll receive "in the event that Mr. Hovsepian does not succeed Jack L. Messman as the chief executive officer of Novell" and in the event that he resigns within a year of when Messman ceases to be CEO.

A change in the company's top leader adds a significant new element to other changes at the Waltham, Mass.-based company. Novell announced a major restructuring Wednesday that cuts 600 jobs and likely will mean at least 400 more are shed through the divestiture of the company's Celerant consulting division.

Hovsepian's promotion to president and COO, and now his stroll toward the CEO office, contrasts sharply with desires Messman expressed in a February interview with CNET News.com. Asked if he wanted to hire a new COO or to be replaced as CEO, Messman responded with a decisive "no."

"They're going to have to drag me out with my boots on. I love working for Novell. I helped create it more than 20 years ago," he said at the time. "I hope the board will support me."

But the board took a different approach when it directed Novell to change Hovsepian's severance agreement. The board made the move on Oct. 31, the last day of Novell's fiscal year, for which financial results haven't yet been posted.

In the company's third fiscal quarter, which ended July 31, revenue declined 4.7 percent to $290 million and net income declined 91 percent to $2.1 million. Meanwhile, profits are surging at Linux's rival Red Hat.

The idea of Hovsepian becoming CEO will probably sit well with some. Jason Maynard, a securities analyst with Credit Suisse First Boston, called in September for new management, among other major changes at Novell. And Jefferies analyst Katherine Egbert is impressed with Hovsepian.

"He's the real deal, by far their best executive," Egbert said. His background at IBM included hardware, software, sales and marketing, all more relevant than Messman's history in areas such as textiles, energy and consulting, she said.

Hovsepian is professional and a good executive for overseeing operations, Maynard said in an interview Thursday. But the analyst reiterated his opinion that the company needs a CEO who also can bring deep change to focus on open-source software.

"I think Ron is suited well for an execution role in terms of operations...He's done a good job in a less-than-optimal corporate structure," Maynard said. "But the reality is that this company needs a technology market vision--somebody who can look out and say 'This is what's happening in the technology market. This is how customers will eventually buy open-source software.'"

Blum Capital Partners, a significant shareholder that owns more than 5 percent of the company's stock, also has cast doubt on the existing upper management's ability. In a September letter, the group said Novell has promise, but added, "The question is whether the current management and board will execute."

Novell declined to comment for this story, and Hovsepian himself dodged the question on Tuesday, before the regulatory filing was published. Asked in an interview if he was heir apparent, he said, "I have enough work to do...I don't spend time staring at the wall (thinking) those thoughts."

But upper management can be a rough place. Novell's former vice chairman Chris Stone departed a year ago, and a source familiar with the situation said Stone had also been slated to take Messman's job. The executives were diplomatic at the time about the change, but Messman in the February interview said he and Stone "had a difference of opinion about how (Novell's) strategy would be executed" and that "his style of operating didn't fit with the company."

Hovsepian has had some incentive to improve Novell. With his promotion, he was granted 300,000 stock options that can be purchased at $7.57 per share, according to the regulatory filing. And he received a salary raise from $500,000 to $650,000, with a possible bonus of another $650,000.

But he also won't be impoverished if the CEO plan doesn't pan out. Under the new terms of the severance agreement, Hovsepian stands to gain more than $1 million if he's not named CEO. Under those circumstances, Novell would pay him 1.5 times his $650,000 salary, a prorated bonus, accelerated vesting of stock options, and dental and health care coverage for 12 months.

 

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