Last Fall we all got quite excited here at the Virtualization Practice about the fate of SUSE, the commercial Linux Distribution, second in market share by value to Red Hat. SuSE is owned by Novell and the acquisition of Novell by Attachmate was announced on November 22nd for around $2.2bn. We noted that SUSE might end up as a standalone entity for subsequent sale to a third party, possibly VMware.
It’s now April, and since these things usually take 3 months and the deal hasn’t closed, clearly something has got in the way. Last week we started to see the way the deal could be unlocked.
As we noted in our Open Source end of year review, it’s a complicated deal driven by Private Equity, and the ability to liberate cash. Novell itself had $1.1M of cash at the point the merger was announced, and as part of the transaction is able to recognize around $280M of deferred tax assets (which have accumulated through losses in the business or in acquired companies). The other cash element derives from a linked transaction where Novell sells 882 patents to a consortium including Microsoft for $450M through a company called CPTN Holdings LLC. If you add up the numbers it becomes clear that the actual software business is costing Attachmate (or rather its Venture Capitalist backers) around $250m, which seems like a ridiculously good deal. Despite this, the deal was approved by Novell’s long-suffering shareholders as long ago as mid-February.
What has happened in the meanwhile is that the US Department of Justice has stepped in to review the patent sale from an antitrust perspective. There have been two separate information requests made, the second of which was responded to by Novell on 4th March. Normally this would have allowed things to proceed by 4th April, but by agreement between Novell and the DOJ the deadline has been pushed out to April 12th. In addition, there is still a possibility that the deal will flounder due to anti-trust reasons in Germany.
Despite the generally-excellent level of disclosure we are seeing about the transaction on the Security and Exchange Commission (SEC) website, there seems to be no obligation to disclose the exact details of the patent portfolio that is being transferred. The Open Source Community is naturally concerned that Microsoft may be getting hold of a stack of Unix and/or Linux patents, but there has been speculation in the media that the patents actually relate to WordPerfect. It is quite hard to use publicly-available sources of patent information to track patent portfolios through assignments at company acquisition, but the difficulty with the WordPerfect theory is that the USPTO doesn’t seem to have many patents originally issued to WordPerfect or that WordPerfect had acquired and subsequently assigned to Novell. We managed to find about half a dozen of these, leaving more than 870 unaccounted for, so it does seem that Microsoft is after Unix patents.
Unfortunately, as is common in protracted merger discussions, Novell’s business is suffering. Year-on-year revenues were significantly down in the first 3 months after the merger deal was announced, and the company made a small loss. The cash isn’t a problem, The company has a lot of cash, it just doesn’t have very much in the way of ideas, and whilst there is a lot of goodwill, the customers are gently drifting away.
However on March 23rd (and as far as we know unreported elsewhere in the media) something else has happened that seems designed to unlock the situation, the Venture Capitalists have decided to hedge their bets for a long protracted conversation with the DOJ about the patent rights. They clearly don’t want Novell to continue in its current form. Who knows, there may be a suitor waiting in the wings to pick up SUSE? and so one of the most convoluted pieces of legal speak I have ever come across has appeared on the SEC website. It seems to indicate that patent rights will be transferred not to CPTN Holdings but to Wizard Parent, LLC (… you couldn’t make it up) which is owned by two Hedge Fund companies called Elliott Associates, L.P. and Elliot International L.P. This seems to decouple the sale of the patent rights from the rest of the transaction, leaving them held in a non-trading entity until some kind of resolution happens with the DOJ, and it is worth noting that this “Elliott” is not Attachmate or its Venture Capitalists, it is the original Hedge Fund that tried to buy Novell before Attachmate came in.
The SEC filing contains the rather amusing line “EACH PARTY HERETO ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES… “. Which may turn out to be an understatement. We believe the bottom line for SUSE is that one way or another the deal will close this month, and soon thereafter we are likely to start to see the next chapter of SuSE ‘s story. Perhaps as a part of VMware?