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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."
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.
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.
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.