Novell Acquires SuSE Linux

Novell Inc. said on Nov. 4 it has agreed to acquire SuSE Linux AG for $210 million in cash, a move that would make the network software company the No. 2 seller of the open source operating system and intensify competition with Microsoft Corp. Along with the purchase, the Provo, Utah, company said it was negotiating with IBM to extend agreements to support SuSE Linux on Big Blue's eServer and software infrastructure products. In addition, IBM plans to buy $50 million of Novell convertible preferred stock.

The acquisition, which is subject to regulatory approval, is expected to close by the end of January 2004. The extended agreement with IBM, as well as IBM's investment, is scheduled to close at the same time.

Investors responded quickly to the news, driving up Novell's stock 32.05 percent, or $1.94, to $7.99 a share in afternoon trading on the New York Stock Exchange. Shares of Red Hat Inc., the No. 1 Linux seller, dropped 14.11 percent, or $2.17, to $13.21 a share.

The acquisition means Novell becomes an immediate market leader in Linux and will have a worldwide technical staff of more than 600 people supporting the OS, Jack Messman, chairman and chief executive of Novell, said.

"The acquisition of SuSE Linux will complete Novell's ability to offer enterprise-class Linux solutions to our customers from the desktop to the server," Messman said in a statement.Linux is free software distributed under the general public license, or GPL, of the Free Software Foundation. Linux vendors make money by providing services and software for the open-source operating system.

Linux has emerged as a major competitor to Microsoft's Windows in the market for server operating systems. Servers are high-end computers used to run business applications.

A Novell-SuSE merger will benefit both companies, while creating a tough competitor to Red Hat.

Besides a strong market position and partnerships it didn't have in the Linux market, Novell gets an open-source OS to integrate with its identity management software, directory, application server and other products. SuSE's server OS will also complement the desktop version of Linux Novell acquired in the purchase in August of Ximian Inc.

"It gives them an opportunity to host all of their excellent technology on the platform, and take part in the open-source community in a very strong way," Dan Kusnetzky, analyst for market researcher International Data Corp., said.For Germany-based SuSE, the roughly $35 million company will become a billion-dollar company with a worldwide support and sales staff and a customer base that includes many Global 2000 companies. "It gives SuSE a much bigger channel to sell its products and services," Kusnetzky said.

Novell, on the other hand, has now gone from a company that wasn't on Microsoft's radar to one that will clearly be in the software giant's crosshairs, Kusnetzky said.

"This means Novell is going to have to move from the slow, deliberate engineering-oriented approaches of the past, and move to Internet-speed decision making and a high focus on marketing," Kusnetzky said.

In 2002, Windows' share of new license shipments increased to 55.1 percent from 50.5 percent in the prior year, according to IDC. That latest number, however, is not expected to go much higher because of competition from Linux and its tech cousin Unix. Linux competes with Microsoft on the low-end of the server market, while the latter OS competes in the high end.

Linux's share of new paid license shipments in 2002 increased to 23.1 percent from 22.4 percent in 2001. Unix systems accounted for 11 percent of the 5.7 million total shipments in 2002. Novell Inc.'s NetWare captured 9.9 percent and other products the remaining 1 percent.Red Hat is expected to feel the most immediate pressure from the SuSE acquisition. In support staff alone, Novell will have more people on the street than Red Hat has employees, Kusnetzky said.

"This could have a pretty negative impact on Red Hat," he said.