Novell Has a Suitor -- and a Serious Stock Bounce

With a languishing stock price, a vague strategy and nearly $1 billion in the bank, software developer Novell (NOVL) has been a fat target for a buyout offer. Actually, it's amazing a deal didn't happen several years ago.

But on Tuesday, hedge fund operator Elliott Associates LP made a $5.75 per share offer for Novell, which comes to roughly $2 billion. The firm, which manages $16 billion in assets, already has an 8.5% stake in the company -- a position it began acquiring on Jan. 5. News of the offer sent the stock soaring by more than 29% in pre-market trading to $6.16 Wednesday morning.

Novell says it will evaluate the offer with the help of its financial adviser, JPMorgan (JPM), although it's a good bet that the company will reject the bid as too low.

From Networking Superstar to Coasting on Past Glory

Founded in 1979, Novell had little traction until 1983. This is when the company hired the legendary Raymond Noorda as CEO and launched NetWare, which was the first software system to network computers. It was a game-changer and Novell became one of the hottest tech companies of the 1980s.

However, by the early 1990s, Novell had made a variety of misguided acquisitions, such as WordPerfect and Quattro Pro. At the same time, Microsoft (MSFT) was continuing to gain significant market share in networking software. By the end of the decade, Novell had essentially lost its dominant position.

Since then, Novell has tried numerous strategies to recapture its former glory, but nothing worked. For example, the company purchased SuSE in 2003 to get into the Linux space. As a sign of strength, the company was even able to strike a major licensing deal with Microsoft, agreeing to an upfront payment of $348 million.

But while the Linux business has posted growth, it has not been enough to offset the relentless deterioration in Novell's legacy network software business. Just look at the company's latest quarterly report. Novell's revenues fell 6% to $202 million, and there is even weakness in Microsoft payments.

One Way or Another, a New Novell Is Likely

Despite the painful decline, Novell still has some positives, among them its 56,000 customers and 5,100 partners (according to the investor presentation). Besides its Linux offerings, Novell also has other attractive technologies, such as in identity and security management.

But Novell has failed to make its businesses mesh. If anything, the company should divest itself of its non-core businesses and make tough cost-cutting decisions. Novell also needs to chart a clear-cut technology road map for its future.

Elliott Associates would be well-suited to do these things. Since 2006, the firm has been involved in the purchase of a variety of tech companies, including Metrologic Instruments and MSC.Software Corp.

Then again, Novell may ultimately wind-up the target of a major tech company such as HP (HPQ), IBM (IBM), Oracle (ORCL) or even Microsoft, although, a strategic deal could be complex because of Novell's disparate businesses.

Whatever the outcome of the Elliott bid, it does look like Novell's three-decade-long run as a public company will soon come to an end.