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Novell to buy SuSE

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Novell to Buy SuSE Linux for $210 Million


Published: November 5, 2003

ovell announced yesterday that it had agreed to buy SuSE Linux of Germany for $210 million, in a deal that shows mainstream software companies are increasingly betting on the free Linux operating system.

As part of the announcement, I.B.M., the leading corporate patron of Linux, said it was making a $50 million investment in Novell. "I.B.M. is showing how important Linux is to them by stepping up its investment," Novell's chief executive, Jack L. Messman, said.

Novell, based in Provo, Utah, is best known for its Netware product, an operating system used mainly for handling data files and printing on corporate networks of personal computers. But that business has come under increasing competitive pressure from Microsoft, which has bundled printing and file management capabilities, along with other features, into its Windows operating system for servers.

Novell has responded to Microsoft's relentless advance by moving more of its business to Linux. Earlier this year, the company announced that future versions of its products would run on Linux. In August, Novell acquired Ximian, a software company in Boston, for an undisclosed sum. Ximian makes Linux management tools and a desktop version of Linux.

"With SuSE, Novell can offer a much more complete set of Linux-based products, from the operating system on up," said Al Gillen, an analyst at IDC, a research firm. "And this further reduces Novell's dependence on Netware."

Novell's shares rose 21 percent on news of the SuSE purchase, closing at $7.33 a share, up $1.28.

SuSE, based in Nuremberg, Germany, is the second-largest distributor of Linux in the world, after Red Hat of Raleigh, N.C. While SuSE is the leading distributor of Linux in Europe, it should benefit - in the United States and elsewhere - from access to Novell's marketing and technical support staff. Half of the 1,200 engineers in Novell's technical support operations have already been trained on Linux.

"With Novell, we can drive the adoption of Linux faster than we could ourselves," the chief executive of SuSE, Robert Seibt, said.

SuSE, a private company, will have revenues this year of $35 million to $40 million, said Mr. Messman of Novell. He said he expected the SuSE unit to grow by at least 30 percent a year, as Linux continues to gain new users. Both SuSE and Novell executives predicted that the combined company should eventually be able to surpass Red Hat as the No. 1 Linux distributor.

Mr. Messman said that SuSE, which employs just under 400 people, will retain much of its independence. The SuSE brand, he said, will be maintained for the foreseeable future.

Commercial Linux marketers like SuSE and Red Hat typically charge corporate customers for their branded versions of Linux, which include additional software features on top of the basic operating system. They also charge for maintenance and technical support. The basic Linux code, which is freely available, is improved and debugged by a network of collaborating programmers, in a model of software development known as open source.

Both SuSE and Ximian offer desktop versions of Linux, a market that is emerging, particularly outside the United States, as governments and companies look for a cost-saving alternative to Microsoft's Windows. In May, for example, the City of Munich said it was switching from Windows to SuSE Linux desktop software on 14,000 PC's used by government workers.

"But this deal is not about taking on Microsoft on the desktop," Mr. Messman said.

Yet he went on to say that Microsoft's ability to tightly integrate its Windows desktop - where the big software maker holds a monopoly - with its server software had helped undermine Novell's longtime lead in PC networking software. And Novell has struggled. In the nine months ended in July, Novell lost $53 million on revenues of $819 million.

Now, Novell will also be able to offer an integrated set of offerings. "Novell will be the only $1 billion company to offer a complete Linux stack from the server to the desktop," Mr. Messman said.

Talks between Novell and SuSE began earlier this year, and what started as technical discussions expanded into merger negotiations, Mr. Messman said. Novell did not discuss a merger with Red Hat. "I don't think it would have been possible," he said. "Red Hat's market capitalization is greater than ours."

The I.B.M. investment in Novell will be in convertible preferred stock. Though the pricing is not yet set, Mr. Messman said the $50 million would give I.B.M. roughly a 2 percent stake in Novell.


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