March 12, 2001 5:30 PM PST

Schmidt out as Novell CEO after merger

Network software provider Novell on Monday said Chief Executive Eric Schmidt will step aside as part of the company's $266 million acquisition of Cambridge Technology Partners.

Novell and Cambridge Technology Partners, two companies that have watched their stock prices and financial results slip in recent quarters, announced Monday that they have joined forces.

Jack Messman, president and chief executive officer of Cambridge Technology, will assume the role of chief executive officer at Novell. Schmidt will continue to serve as chairman and chief strategist for Novell.

Though the Silicon Valley veteran engineered a brief turnaround at the struggling software provider, Schmidt could not rebuild a business that has consistently lost market share to competitors such as Microsoft and Linux in recent years.

Novell, which develops network management and operating software, said it will exchange 0.668 shares of its common stock for each outstanding share of Cambridge Technology Partners.

Based on Novell's closing stock price of $6.06 a share Friday, the deal is valued at more than $266 million.

Novell said the merger will allow it to provide corporations with Internet products and services.

Cambridge Technology Partners provides information technology and e-commerce strategy consulting services. The company has been hit by a slowdown in Internet services spending, and recently announced layoffs.

Novell shares closed off 25 cents to $5.81 ahead of the merger announcement and fell to $5.44 in after-hours trading. Cambridge Technology shares slipped 21 cents to $3.09 before moving up to $3.65 in extended trading.

Novell executives said the transaction will be accounted for as a purchase and should be completed sometime in the third quarter. Cambridge Technology Partners will become a wholly owned subsidiary of Novell.

The deal has already been approved by both companies' boards of directors.

"This move is strategically consistent with where we are taking Novell. The combined talent of Novell and Cambridge will bring us closer than ever to capturing the value of Novell's Net services strategy," Schmidt said in a statement.

Bill Loomis, a Legg Mason analyst, said, "I see this as a merger between two companies that have struggled to find their stride in their individual spaces.

"The price wasn't much of a premium, about 25 percent above Cambridge's closing price Monday. However, I'm sure their shareholders would have preferred a cash deal at a higher premium," he added.

Schmidt arrived at Novell in 1997 amid much fanfare after serving as one of the primary architects of the Java programming language at Sun Microsystems. It was thought that Schmidt could resuscitate Novell, a company that once challenged Microsoft in the operating system software business but fell on hard times as the Internet took hold.

Schmidt guided Novell through a tough period before engineering a brief rally in the company's fortunes. But Novell continued to be dominated by executives schooled in the art of selling its NetWare operating system, not the Net-friendly programs such as Novell's directory services that Schmidt wanted to push as the company's new focus.

As a result, Novell's turnaround was short-lived.

The departure of one of Silicon Valley's brightest technological minds was noted in the sixth paragraph of a Novell press release detailing the company's acquisition of Cambridge Technology Partners, released at the close of the market Monday.

Hard times for both companies
Last week, Cambridge Technology Partners warned that its first-quarter sales would miss analysts' estimates. In January, it announced it would ax 280 employees as part of its ongoing effort to reach profitability.

It now expects to post sales of around $120 million in the quarter, down from previous estimates of $125.1 million.

First Call consensus pegs it for a loss of 12 cents a share in the quarter.

Company executives said Cambridge Technology hopes to post an operating profit for 2001 on sales of $525 million, down from $586.6 million in fiscal 2000.

Novell, faced with competition first with Microsoft and now Linux, has lost server operating system market share every year of the last five, said IDC analyst Dan Kusnetzky.

"Novell has persisted in using a business model that worked very well for them in the 1980s," Kusnetzky said. Novell tried to encourage reseller partners to advocate Novell products, but Microsoft bypassed that route by convincing the customers to ask for Microsoft products instead, he said.

Novell has also trimmed its work force in recent quarters in an effort to cut costs and move back into the black.

Last quarter, it posted a profit of $3.2 million, or 1 cent a share, on sales of $245 million, topping analysts' reduced estimates.

However, it cut its fiscal 2001 sales target to roughly $1 billion and predicts earnings of between 17 cents and 18 cents a share.

In fiscal 2000, Novell earned 55 cents a share on sales of $1.16 billion.

Both stocks have seen far better days.

Novell shares peaked at $34.56 last March before falling to a 52-week low of $4.75 in January.

Cambridge Technology Partners moved up to a high of $18.13 last March before it dipped to a low of $1.38 in December.

News.com's Stephen Shankland contributed to this report.

 

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