November 4, 2003 1:24 PM PST

Novell reinvents itself around Linux

For Novell, Linux is not just a popular operating system--it's a lifeline for the company and its shrinking base of NetWare customers.

Novell greatly expanded its presence in the Linux marketplace on Tuesday by announcing plans to acquire SuSE Linux for $210 million in cash. It also said IBM will be investing $50 million in Novell, which will represent roughly two percent of the software maker's value.

The purchase of SuSE Linux, a major distributor of the Linux operating system, follows the acquisition of another open-source software provider, Ximian, in August. It also comes after an announcement by Novell earlier this year that it will offer a number of networking software services on Linux.

That combination of steps improves the long-term prospects for Novell, which has struggled to regain profitability the past three years, company executives said Tuesday. Rather than being tied to the relatively small installed base of customers that use its NetWare operating system or its GroupWise messaging software, Novell wants to ride the rising popularity of Linux in corporations.

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Novell CEO Jack Messman emphasized on Tuesday the company's ability to deliver Linux on servers and desktop PCs. "Linux no longer needs to stay at the periphery. It can come into the core of the business. It can come into the data center," he said.

With the SuSE Linux acquisition, expected to be completed in January, Novell gains the leading distribution of Linux in Europe, which the company can begin to sell more aggressively in the United States and other countries. Novell's line-up now includes a desktop and a server version of Linux, as well as a number of utilities for managing and configuring Linux-based machines picked up through its Ximian purchase and developed in-house for its ZENworks product line.

The combination of Linux, add-on management products and Novell's support and training services should offer corporate customers a viable alternative to products that are based on Microsoft's Windows operating system, according to analysts.

"Novell has a complete stack of software, which will make organizations very comfortable getting the same support they expect from proprietary products, even though it's open source from top to bottom," said Dan Kuznetsky, an analyst at IDC. The Linux strategy "gives Novell an opportunity to refocus...and significant hopes for growth," he said.

Novell's aggressive Linux push is the company's latest attempt to reinvent itself and gain sustained profitability. The Provo, Utah-based company was a PC industry pioneer and held an early lead in the market for network operating systems on PC networks. During the 1990s, it became the target of Microsoft, which steadily picked away at the NetWare customer base with Windows NT. As Novell lost operating system customers, it began emphasizing its strength in networking software for managing users' identity and log-in information in its own directory.

In 2001, Novell purchased Cambridge Technology Partners, a technology consulting company. The move brought in Jack Messman as CEO. And last year, Novell purchased Java server software and tools provider SilverStream to improve the interoperability of Novell software with Java applications.

With Tuesday's acquisition of SuSE Linux, Novell is showing that it is serious about Linux for its long-term strategy, which includes helping its existing NetWare customers switch over to Linux, according to Philip Rueppel, a financial analyst at America's Growth Capital in Boston. Assuring customers that it has a sound strategy and viable product plans has been one of Novell's biggest challenges, he said.

The SuSE Linux deal "gives current Novell customers some confidence the company is on a track...that seems to take advantage of Novell's strengths, and it's a viable strategy for the future. And that's different from Novell of the past, which had six strategies in six years," Rueppel said. "This will slow the erosion of NetWare in their installed base."

Show me the money
But even with the string of acquisitions and a complete Linux product set, the company still needs to prove that it has developed a profitable business model and made the internal changes necessary to thrive in the Linux marketplace, said Tom Rhinelander, an analyst at research firm New Rowley Group.

"Novell is delving deeper into the Linux business, which is hard to make money in, and Novell is having a hard time doing that already," Rhinelander said. "They still have to make the mental transition from the 'NetWare company' to a company that is Linux-first with services."

Drake Johnstone, an analyst at Davenport & Co., forecast that Novell will be profitable for calendar year 2004. Messman said the SuSE acquisition will not have a significant impact on the combined companies' revenues this year but will improve long-term revenue prospects.

With its Linux suite, Novell will be competing directly against its longtime foe, Microsoft. But company executives downplayed the old rivalry, which has left Novell bruised and in disarray.

"We didn't do this (deal) to compete with Microsoft," said Chris Stone, vice chairman in the office of the CEO at Novell. "Our objective is to reduce the impediments to Linux in the enterprise."

Stone spearheaded the acquisition of SilverStream and played an important role in forming Novell's Linux strategy after rejoining the company in 2002, after a three-year break. In an interview with CNET News.com earlier this year, Stone said the company was looking at open-source and standards-based software to bolster its visibility in the industry.

Although Novell's success is far from assured, analysts said the Linux gambit does open up the possibility of more realistic competition against Microsoft, including in selling software for desktop PCs.

"I personally would like to see more competition on the desktop, because that is the area where Linux deployments are still weak," said Chad Robinson, an analyst at the Robert Frances Group. "It's a complex topic and not something a small company can tackle alone."

 

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