Hedge Fund Offers $2 Billion For Novell

CWmike writes "A hedge fund that is already one of Novell's largest shareholders offered on Tuesday to acquire the struggling, cash-rich enterprise software maker for $2 billion. The unsolicited offer, from New York-based Elliot Associates L.P., is for $5.75 per share in cash, a dollar per share more than Novell's closing price Tuesday of $4.75. The offer caused Novell's stock to leap 29% to $6.15 in after-hours trading. Because Novell is so cash-rich — it had $991 million in cash and equivalents at the end of January (PDF) — Elliott says the deal values Novell as an enterprise alone at about $1 billion."

Comments

Already Under Investigation

[eldavojohn]

A law firm is already investigating 'potential breaches of fiduciary duty and other violations of state law in connection with an alleged unfair takeover.' Basically seems to allege that should this deal go through, it would be unfair for current long time shareholders of Novell as Elliott's takeover would be underpaying and ripping them off. I'm not sure if this is standard operating procedure or not but one would think that the stock market would offer a good estimate of Novell's true worth. Apparently someone thinks 20%+ on top of that is unfairly low.

Re:Already Under Investigation

[Fnkmaster]

The share price jumped *because* of the takeover offer. The market valued the company at less than the takeover offer until the offer came in. There's nothing inherently wrong with a fund offering to buy out the minority shareholders if they think they can see a way to make the company worth more by owning it all themselves (perhaps they intend to break it up and sell the products off to people who would value them more highly in their enterprises, perhaps they just think management sucks and the best way to replace them is to take over the firm in its entirely, then flip it to a private equity firm or strategic buyer).

The point is the market was already saying the enterprise value of Novell was less than $1B. Some guy who runs a fund thinks that's overly pessimistic and made an offer to buy out the firm.

The fact that the market price for the shares jumped higher than the offer price only means that the market, on average, thinks this is the first offer in a potential bidding war and the price is likely to go higher than that before a deal closes. That is also very common in the case of an unsolicited offer when nobody was thinking "this company is for sale" prior to that offer coming in.

BTW, nobody in the finance industry really thinks the market always offers a fair estimate of a company's worth to all potential owners. Even believers in the weak-form efficient market hypothesis wouldn't state that - they would acknowledge that the value to a private market buyer might be higher than the public market value, which more likely represents the market's estimate of future discounted cash flows to equity owners of the company. Actually, to be more accurate, the public market value represents a consensus estimate of what people think *other* people would estimate the future discounted cash flows to equity owners of the company would be.

If you find that confusing, welcome to the science and art of valuation.

Re:It's been a while, but...

[poetmatt]

beyond that norton is not novell, novell actually has a pretty strong enterprise presence. A hedge fund buying novell is a really bad sign, to be honest. Novell is doing fine. Them trying to label Novell as unsuccessful is basically a flat out BS.

What I suspect this means is that someone's trying to stop Novell before the Novell v. SCO case comes around. They're trying to see if the Novell board is greedy enough to do it, and I suspect they aren't and neither are the shareholders.

A hedge taking over a company if that hedge has no experience managing in the sector of the company they're taking basically means they're going to tack on association/management fees onto novell and dump them to someone else.

$2 Billion?!

[Rik Sweeney]

Where the hell did they get that kind of money? I guess that even during a recession people still need their hedges pruned and their bushes trimmed.

Fiduciary duty

[sjbe]

I'll speculate that the phrase "potential breaches of fiduciary duty" is lawyer-ese for "your bid is too low".

No speculation needed. That is exactly what it most often means. The board of any company has a duty to maximize the return to any shareholders. Selling the company might be the best way to accomplish that - or it might not. Everything in finance is essentially a guess as to what will make the most money. It needs to be a well researched and reasoned guess but it is still a guess at the end of the day. If shareholders think they are getting a bad price it is entirely reasonable and proper for them to lawyer up and say so.

I actually researched Novell as a possible investment about 5 years ago and came to the conclusion that the company was in a slow death spiral. Not an inescapable one but I don't see them doing anything that gives me confidence they could escape it and their stock price hasn't budged since then. The price being offered is approximately the current market capitalization. (the market cap rose yesterday once the offer price was announced - arbitrageurs bought in to bring the price close to the offer price) Novell has a lot of cash and they have some decent products that have high switching costs which is keeping them in the game. But they aren't capturing much new business. Basically I think they'll end up getting sold in whole or in parts to Oracle, IBM or HP after the hedge fund is done stripping out all the cash from the company. Novell likely has undervalued assets that are worth more separately than together.

Disclosure: I am an accountant and I've worked on due diligence for the sales of companies.

Worth more in pieces than together

[sjbe]

From a pure financial play I don't see how paying 2 billion for 990+ million cash makes sense.

Basically because the hedge fund is probably betting they can sell the assets of Novell for more than $1.1B. Groupwise alone in the right hands (HP or Oracle maybe?) is basically an annuity that might be worth that much. Novell has other products that are decent and probably worth something to the right party. My guess is that the hedge fund will strip out the cash and then sell the assets of the company to the highest bidder on the theory that the assets are worth more than the whole company.

The rest of Novel isn't really worth anything UNLESS, they turn Novel into another FLOSS services firm like RedHat.

Doubtful. Novell's value is in its installed base of software - not in their services. I don't think it could turn itself into a successful service company - better to sell to a large service company (HP, Oracle, IBM). I don't think they have the resources to transform themselves like that and if they tried I'd expect the shareholders to be pissed. Selling the company is probably the right play - the only question is what price can they get?

Re:It's been a while, but...

[poetmatt]

Umm? Do you even realize who this hedge fund is? I'm going to copy from groklaw here.
Sounds like no, my sarcastic friend. Elliott is run by Paul Singer. Link states:

Paul E. Singer, a former corporate lawyer, is "the founding partner of Elliott Associates, a $7 billion hedge fund with a conservative, risk-averse bias that has been in business since 1977, making it one of the oldest funds around. A reserved, private man who would answer questions only via e-mail, Mr. Singer is a self-described conservative libertarian who has given millions of dollars to Republican organizations that emphasize a strong military and support Israel."

Singer is a member of the Board of Trustees of the neo-conservative think tank the Manhattan Institute for Policy Research; a "member of the boards of the Jewish Institute for National Security Affairs and of Commentary Magazine, and is on the Board of Advisors of the James Madison Program in American Ideals and Institutions at Princeton University", and a member of the Board of Fellows of Harvard Medical School.

Also from the NYT

Paul E. Singer is the founding partner of one of the oldest hedge funds around. And while he has become a major donor to Republican and conservative causes in recent years, he has largely managed to stay out of the limelight, even avoiding having his picture appear in newspapers. [...]

Howard Dean, the chairman of the Democratic Party, questioned “Paul Singer’s involvement in this dirty trick aimed at stealing the White House.” A group of Democrats filed a complaint with the Federal Election Commission charging that Mr. Singer had been acting on behalf of Mr. Giuliani in his efforts to change the California law — which Mr. Singer and the campaign deny. And the Democratic National Committee drew attention to the part of Mr. Singer’s business that involves buying the debt of poor countries at a discount and then seeking repayment in full — prompting an article in The Times of London labeling his firm, Elliott Associates, a “vulture fund.”

.

I didn't have to read either of those to already know that. Notice from the NYT: Vulture fund.

Meanwhile, what's the kicker?

The shareholders are pissed already and think it's BS/hostile takeover. from that link:

An investigation on behalf of current long term shareholders in Novell, Inc. (Public, NASDAQ:NOVL) concerning shareholder claims over potential breaches of fiduciary duty and other violations of state law in connection with an alleged unfair takeover was announced.

So umm, whoops?

Re:Sold!

[hairyfeet]

It is like I have been saying for years...Wall Street is just Las Vegas with better clothes....a vulture comes in, and day traders, the boils on the ass of society, go apeshit and start buying, driving up the price. It is thanks to this kind of stupidity that companies only think short term now and let their assets go to pot. It is the whole "screw everything but the quarterly report!" that has caused so much of this country to fall apart. If a company could increase the quarterly by burning the company for the insurance the day traders would be all for it. It is nothing but legalized gambling for those that aren't inside traders.

As for TFA? My guess is the raiders want to drain the coffers and spin off Groupwise and a few other assets to make a quick buck. There are enough Groupwise customers out there that it could make them a quick buck, hence the offer. The only question is will they pull a Yang and get greedy and price themselves right out of the offer with poison pills and demands for crazy money. Either way their stock will probably hit the basement if the deal doesn't go through, as the day traders follow the herd to the next deal.