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INTEGRATION WATCH:
Assessing Sun-Novell Rumors
By Andrew Binstock
 September 1, 2004 — The Aug. 2 issue of the Wall Street Journal contained an article that attributed to Sun Microsystems Inc. president Jonathan Schwartz comments regarding Sun’s inspection of Novell as a possible acquisition target. If true, these comments, I believe, do not augur well for either company. It’s hard to determine which one would be worse off if such a merger or acquisition were to take place.
Both companies share two important defects that I think will be additive should the companies merge: They’re losing money and they lack strategy.
Novell has lost money during the past three years and in seven of the past eight quarters. During this time, it has announced a variety of different strategies. It bought Silverstream for US$210 million and announced to an incredulous analyst corps that it would become the fastest executing Java platform anywhere. As we know, this went nowhere.
With no explanation of strategy, Novell then embraced open source and purchased Ximian in 2003 and SUSE Linux in 2004. At the point when the company should have articulated a coherent strategy for these acquisitions and explained how they dovetailed with NetWare, Novell remained frustratingly silent.
With neither a Linux strategy nor an exit path for its diminishing NetWare product lines, I don’t see any way that Novell can make profits of any real significance. The one area that has held up is the consulting services that now represent more than a third of the company’s income. This income derives in part from Novell’s 2001 acquisition of Cambridge Technology Partners.
Possibly Novell can position itself one day as the go-to vendor for Linux services in the enterprise. But this puts it in the line of fire with IBM—one of its principal backers—and hardly provides much useful value for a Sun acquisition. Even Schwartz was unable, or at least unwilling, to articulate what he thought was attractive in Novell other than it would deprive IBM of its principal Linux distribution. (I presume he was being facetious even though this was reported as a serious comment.)
Sun’s supposed interest in Novell is actually rather troubling. Regular readers of this column know that I feel very pessimistic about Sun’s long-term prospects.
Like SGI, Sun was chased out of the workstation market by low-cost Intel boxes. Unlike SGI, it landed on its feet in the server space early enough to pull off an entire product line transition to servers. This adaptation saved the company.
However, in the server space Sun has formidable foes in HP and IBM. As Intel servers from these companies ate into the server market from the bottom, Sun was vulnerable because it had no Intel strategy—a point it made publicly with considerable relish.
After fumbling for a while, Sun began to adopt AMD’s 64-bit x86 processors. This was a good technological choice, as Sun could distinguish itself from Intel’s server partners while delivering processors that were leading the way in server architecture. At this point, it might have seemed a bold strategy to abandon Sun’s own SPARC processors and begin migrating clients to AMD servers running Solaris or Linux.
This strategy could not fly, though, because at present, the Opteron processors can scale only to eight-way configurations, and can’t go anywhere near the vertical scalability of Sun’s server behemoths. With enterprise customers using Solaris on far more powerful systems, Sun was sitting in the unenviable position of having a low-end hardware/software product line that was orthogonal with its high-end line. This untenable situation has been ripening for a full year with no strategic resolution from Sun.
So, stuck at this crossroads, Sun’s leaders have to wonder: What are the options? They are agonizingly few. The company sits on a hoard of more than US$6 billion in cash and marketable securities, which most analysts point to as the company’s last parachute. Once this is gone, Sun had better be profitable or it will be gone.
What would you, faithful reader, buy with that money? Would you buy Novell (which at current market rates would cost roughly $2.5 billion to $3 billion)? Certainly, the services portion of Novell would be a benefit, since Sun has vainly aspired to be a player in services.
But would Silverstream, Ximian, SUSE or NetWare technologies add much value? It’s hard to see how. So why would Sun consider this option, much less discuss it in public? I believe that talk of the Novell acquisition was a slip that let us peer behind the curtain, where we could see how few Sun’s options are—even when viewed by its own senior management.
Andrew Binstock is the principal analyst at Pacific Data Works LLC.
Andrew Binstock is the principal analyst at Pacific Data Works LLC
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