It's almost a Pavlovian response: If a buyer announces an acquisition, investors tank the stock of the buyer. Buyers typically pay too much and overestimate their abilities to make the deal work.
This was turned on its head this week when Novell (Nasdaq: NOVL) announced it was purchasing SuSE Linux for $210 million in cash, or a lofty five times trailing sales. Investors swarmed and pushed Novell 21% higher (at one point, it was up 45%). It didn't hurt that IBM (NYSE: IBM) agreed to invest $50 million in Novell preferred stock.
Novell is one of the many victims of the Microsoft (Nasdaq: MSFT) machine. Its networking operating system, NetWare, has gone from controlling more than 70% of the market to a measly 4%. And the trend is worsening still.
However, the magic bullet may be an operating system called Linux. It is open source, which means it is free and allows customers to make changes to the code for customization -- the precise opposite of Microsoft's approach.
In August, Novell purchased a developer of Linux desktop software, Ximian, for $40 million in cash. But the SuSE acquisition is much more important, since the company is the No. 2 player in the Linux marketplace. Shares of the top player, RedHat (Nasdaq: RHAT), dropped on word of the acquisition.
The result of its deal-making, Novell now has a comprehensive offering of Linux solutions geared for the corporate market. Interestingly enough, Novell will also be able to provide high-end consulting services for Linux users. Several years ago, the company purchased the consulting firm Cambridge Technology Partners.
No question, Novell has set forth a clear strategy for growth. But, the fact remains that Linux is still in its early stages. Also, that it is no easy task to integrate tech companies.
But most importantly, Novell seems to change its strategy almost year-to-year, with little tangible results.
Tom Taulli is the author of six books on investing, including Investing in IPOs (Bloomberg Press), as well as a professor of finance at the USC School of Business (don't worry, he does come out of his ivory tower). You can reach him at tom@taulli.com.
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