March 13, 2001 2:05 PM PST

Novell still standing as software sands shift

Network software maker Novell's latest pit stop on the road to recovery included the acquisition of a technology services company and the exit of its chief executive Monday, raising another round of questions concerning the company's viability.

Eric Schmidt, once viewed as the company's savior, plans to step aside as chief executive as part of the company's $266 million acquisition of technology consultant Cambridge Technology Partners. Cambridge's Jack Messman will run the combined company. Shares of Novell dipped on news of the deal.

The move represents a marked shift for Novell. The product company once duked it out with Microsoft and held sway over a huge server software business that helped create the concept of corporate networks, or LANs (local area networks).

In recent years, Novell has been stuck serving a loyal, but steady base of software customers rather than expanding its business. Meanwhile, rival software from Microsoft and Linux has chipped away at its market share.

"This (acquisition) is just another example of when a product company realizes that growth does not come from products, it comes from services," said Forrester Research analyst Christine Ferrusi-Ross.

Another analyst said the company continues to operate as if it were selling software in the 1980s. What seems clear is that like other veteran software providers that have lost their way in one respect or another, such as Computer Associates, Novell continues to cast about for an anchor to its business.

Services and consulting and the benefits associated with such an enterprise, it seems, is the Provo, Utah-based software company's latest gambit to reverse a downward trend in sales.

Novell said it has experienced a 50 percent growth rate in its existing consulting and services arm. With the addition of Cambridge, the company said it hopes to reach a goal it set out two years ago: to have 30 percent of revenue come from consulting by 2002.

"It achieves the goals we set out," Schmidt said Monday on a conference call with analysts. "Cambridge takes Novell to where we want to be over the next year."

Schmidt says the acquisition will help the company complete an internal effort started in August of last year dubbed "Project Napier," undertaken with the help of consultants Morgan Stanley and McKinsey & Co.

The project was intended to hone a strategy called "One Net," a loosely defined way for Novell's software to sit inside the Internet and provide technology services--such as sophisticated PC user management--to customers.

A new strategy
But the move also raises questions about Novell's position as a technology innovator. Schmidt arrived at Novell in 1997 after helping Sun Microsystems launch its Java programming language as its chief technologist. With his strong technology resume, it was thought that Schmidt could turn a struggling Novell around, making the company's outdated approach to software Net-friendly.

By linking with a consulting and services company, however, Novell's products may survive--but only as a part of a larger package of technology services. Schmidt will retain his title of chairman and will become the company's chief strategist.

And Schmidt is effusive about the move, noting that it is in keeping with what he set out to do at Novell. "The strategy is right," he said.

Messman, the new chief executive, took over the top spot at Cambridge Technology Partners nearly two years ago. He came from Union Pacific Resources Group (UPRG), a North American independent oil and gas exploration and production company. Messman, who also sat on Novell's board, has held positions in various industries, including technology, environmental services and banking.

"Jack (Messman) has done a decent job in turning around Cambridge, so it's not that surprising. I can only believe that Eric needed a guy with more experience at the operating level rather than a strategic guy like himself," said Karl Keirstead, an analyst with Lehman Brothers.

"And hats off to (Schmidt) if he feels that he wasn't the right guy," Keirstead said.


Meta Group says the outlook for struggling Novell in seeking relief by purchasing a struggling services company--Cambridge Technology Partners--is not very bright.

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Too late to the party?
Novell may now be able to hone its operations and grow its revenue--something Wall Street has hoped for. Yet the possibility of a business recovery on the strength of software may be a thing of the past.

It was former Novell Chief Executive Ray Noorda who--even though Novell dominated the market for server software at the time--first screamed "monopoly" at Microsoft, long before the company's widely publicized antitrust skirmish.

Highly regarded Hewlett-Packard executive Robert Frankenberg was hired in the early 1990s to protect and expand Novell's fast-growing server software business. But he ran into several roadblocks in his efforts to grow Novell's business.

After his ouster in fall 1996, Novell appeared rudderless and particularly out of fashion amid the Internet boom until Schmidt agreed to run the company in early 1997. He took over a Novell with far greater problems than he imagined, Schmidt said in previous interviews, and his first year as chief executive was largely spent in minimizing the damage.

But Novell experienced a renaissance of sorts starting in 1998 amid an Internet-driven technology boom, and by early 2000 Schmidt was receiving accolades for rescuing the company.

Its stock, previously trading in the single digits, reflected that optimism. In fact, in early January of last year, Novell shares traded as high as $40.

Still, Novell's success was short-lived, as the company continued to be dominated by a sales force bent on selling its NetWare operating system. The group was ill-equipped to alter its sales pitch for a new set of Internet-based products, according to several former executives who declined to be named.

As a result, many of the executives Schmidt brought in to help him engineer Novell's resurgence left the company. Novell also has reported less-than-inspiring sales in recent quarters and was forced to cut 16 percent of its work force. Its stock now trades at just over $5.

Schmidt said Novell can now deliver on its strategy to provide Net services software and also continue to define new networking technologies in a "fundamental and meaningful way."

"Novell's significance is growing," he said.

Only time will tell if Novell's latest twists and turns will result in success or in further acknowledgement that the company's best days are behind it.

News.com's Melanie Austria Farmer and staff writer Larry Barrett contributed to this report.

 

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