Acquisition, new CEO, fan doubts about Novell

Beleaguered Novell heads into its annual BrainShare conference this week carrying a new leadership structure and a significant new acquisition that have customers and industry analysts questioning the wisdom of both.

          Beleaguered Novell heads into its annual BrainShare conference this week carrying a new leadership structure and a significant new acquisition that have customers and industry analysts questioning the wisdom of both.

          The company last week announced that chairman and CEO Eric Schmidt - once hailed as a saviour - would relinquish the CEO title and instead guide e-commerce and internet undertakings as chief strategist. In conjunction with that move, Novell is acquiring e-business consulting company Cambridge Technology Partners, whose top executive Jack Messman has long served on Novell's board. He will succeed Schmidt as CEO.

          Veteran Novell employees remember Messman - not always fondly - from his executive stint at Novell Data Systems and successor Novell in the early 1980s. Those who follow Novell closely are expressing skepticism about the $US266 million acquisition, saying the union promises little synergy.

          Also, sources say Schmidt wanted a graceful exit from day-to-day operations four years after being lured from Sun to transition Novell into the internet age. Schmidt says it has been frustrating that he hasn't been able to communicate what he calls "the brilliance of [Novell's] Net Services strategy."

          Analysts say the management change was necessary.

          "Eric Schmidt is a visionary," says Steve Shepich, an equity analyst with H&R Block Financial Advisors. "He's definitely the guy you want to lead your strategic direction, but operationally he's dropped the ball and lost the opportunity to drive directory services when Microsoft was late with Windows 2000. Novell hasn't been able to sell its idea."

          Until last year, things had been looking up for Novell and Schmidt. The company had launched its One Net internet strategy, made a foray into e-commerce with its iChain product and reported 16 profitable quarters. Fortunes for Novell quickly nose-dived in 2000 when the company reported four dismal financial quarters and an annual net income of just $US85.3 million, down $US105 million from the year before. In the first quarter of 2001, Novell sustained a $US7.7 million loss on sales of $US245 million. Schmidt attributed the drop to a downturn in sales of Novell's packaged products.

          Customers say Novell could still be successful if it receives the consulting help it needs in selling and integrating the company's newer Internet and e-commerce focused products.

          The company has introduced several products in the past year that support its One Net strategy.

          "Many of Novell's newer products require consulting expertise," says Ron Diebert, manager of network services for Baltimore County government in Maryland. "The average [Certified Novell Engineer] I have [requires consulting help] when you are talking about using DirXML, iChain or Novell Portal Services."

          Messman, while a relative unknown to the financial and industry analyst community, is familiar to those who worked with him at Novell's predecessor, Novell Data Systems. From 1981 to 1983 Messman worked for Safeguard Scientific, the venture capital firm that funded Novell Data Systems.

          "He was our hatchet man," recalls Reid Clarke, a Novell founder. "He came out to fire the first president and was sent by the board to find out why Novell Data Systems didn't make its projections the second year. Safeguard wanted to sell the company, and Messman had me looking around to sell it to anyone that would buy."

          In his role with Novell Data Systems, Messman hired Ray Noorda as CEO. Noorda and Safeguard Scientific reorganised the company as Novell, Messman also hired a group of young computer scientists called SuperSet, which included Drew Major, Kyle Powell and Dale Neibaur, to write a program called ShareNet that let a computer share its disk with other computers.

          Noorda and Safeguard Scientific refashioned Novell from a failing manufacturer of terminals, printers and PCs into a market leader for system software.

          Analysts are concerned about Messman's ability to continue Novell's thrust into the Net Services marketplace.

          "I'm not bullish on the acquisition," Shepich says. "It's not as if Cambridge is selling Novell technology. I don't know how they are going to get synergies going. I don't know that Cambridge is marketing effectively either."

          Last year, Cambridge Technology posted a net loss of $US62.5 million on sales of $US586 million. The company, which derived 74% of its revenue from e-commerce products and services, is vendor agnostic.

          Messman isn't concerned that Cambridge consultants have little familiarity with NetWare or Novell's products.

          "We will help Novell define new e-solutions models," Messman says. "We will also be able to maintain Cambridge's objective and independent point of view to the software choices that solve customer problems in the best possible way."

          Novell hopes to grab 30% of its revenue from consulting services this year. In 2000, consulting was only 5%.

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