March 13, 2001 8:20 AM PST

Novell falls on merger uncertainty

Novell shed nearly 10 percent as analysts questioned its acquisition of Cambridge Technology Partners.

Though all agreed that Novell got a good deal on Cambridge Technology shares, a Lehman Brothers analyst said the two companies could have a tough time integrating.

After two years of rumors that it would merge with various software and services firms, Cambridge announced its sale to Novell on Monday night. Novell's CEO is stepping down as part of the deal.

Novell, which has traditionally made a network server operating system to connect desktop PCs to corporate networks, will be shifting into information technology (IT) consulting with the deal. Cambridge Technology is a services company that offers custom software development, software implementation and management consulting.

Novell is paying about $245 million, or $3.88 per share, a 25 percent premium over Cambridge Technology's closing price. But the latter's shares were up only 28 cents, or 9 percent, to $3.38 Tuesday, and Novell's shares sunk 56 cents, or nearly 10 percent, to $5.25 as an analyst questioned the viability of the deal.

"We are cautious about the merger for several reasons: successful mergers in the IT services industry are rare; there is no good precedent for a merger between a software company and an IT services firm; the overlap between the two firms does not appear to be significant; and Novell's guidance for 25 percent earnings per share accretion from the deal looks aggressive," Lehman Brothers analyst Karl Keirstead wrote in a report.

Keirstead cut his rating on Cambridge Technology to "market perform" from "buy," to "reflect the deal and the merger risks."

Losses and gains
Novell isn't exactly getting a growth engine. Cambridge Technology and most of its peers have preannounced several times as the IT services market gets roiled by market conditions. Its revenue went from 40 percent growth in 1998 to 3 percent growth in 1999, then shrunk 7 percent in 2000, and it is expected to recede 16 percent in 2001. The company has said it expects the merger to have a diluting effect in 2001 of 7 percent to 9 percent.

What the company does get is a big addition to its current consulting organization; the merger will add about 2,800 IT professionals focused on systems integration to Novell's current staff of 300, which is focused on systems design and implementation. Several analysts saw that as a positive.

Goldman Sachs analyst Rick Sherlund maintained his "market perform" rating on Novell, and noted that though it will lower numbers for the first year, the deal will add to earnings by about 25 percent in 2002.

Dresdner Kleinwort Wasserstein analyst Stephen Dube suggested investors "initiate or add to positions." He noted that Cambridge Technology's base of over 750 clients will provide greater exposure for Novell, something that should be a boon to business.

The acquisition "may add to existing uncertainty, but should add to the longer-term attraction of the stock," he added.

Though the news may not have been stellar for Novell, it did have a positive impact on Safeguard Scientifics.

Janney Montgomery Scott analyst Richard G. Jacobs noted that Safeguard, which owns 17 percent of Cambridge Technology, or about 10.7 million shares, will get about $42 million in Novell stock as part of the deal.

"The merging of SFE's more troubled partners is a sign that the company is serious about only focusing on its more promising partner companies," wrote Jacobs, who reiterated a "buy" rating on the stock Tuesday.

 

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