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Date: Thu, 21 Jan 93 16:02:51 PST
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From: surfpunk@osc.versant.com (jnyyf vzcrqr zl cebterff)
To: surfpunk@osc.versant.com (SURFPUNK Technical Journal)
Subject: [surfpunk-0032] UNIX: analysis of the acquisition of usl by novell
Keywords: surfpunk, novell, USL, unix, Ray Noorda
- | What is the refusal of *Art*? The "negative
| gesture" is not to be found in the silly nihilism
| of an "Art Strike" or the defacing of some famous
| painting -- it is to be seen in the almost
| universally glassy-eyed boredom that creeps over
| most people at the very mention of the word.
|
| -- Hakim Bey, TAZ
|____________________________________________________
<keith@cc.gatech.edu> called this analysis to my attention.
It had several factoids I hadn't seen/realized,
and derives some scary conclusions.
--strick
________________________________________________________________________
________________________________________________________________________
Newsgroups: comp.unix.questions
Subject: The Novell/AT&T agreement to sell Unix
From: harley@engrhub.ucsb.edu (Harley Hahn)
Date: 13 Jan 93 05:20:09 GMT
Last week I posted an article describing the impending deal
between AT&T and Novell under which AT&T will sell Unix System
Labs to Novell.
I said that I would be writing an analysis for Unixgram-X
(a worldwide Unix newsletter, published in London and New York
each week and widely read by executives/analysts/managers etc).
I asked for people comments about the deal. Thank you to the
many people who contributed their thoughts. In this article,
I am posting the analysis that I wrote, as it was published in
last Friday's Unixgram-X.
Before you read it I have two quick things to say:
(1) In the newsletter, they changed the title to:
"AT&T, Novell and the Shrink-Wrapped Sellout".
(2) The American publisher told me afterwards that the reaction
from USL and others was swift and that I "hit a nerve".
----- start -----
ANALYSIS OF THE ACQUISITION OF USL BY NOVELL
===========================================
by Harley Hahn and Rick Stout
The recent letter of intent signed by AT&T and Novell in which
they revealed their plans for AT&T to sell Unix System
Laboratories (the home of System V Unix) is of enormous
importance. No one doubts that the move will have significant
lasting effects on the world of Unix and its relations. The big
question is, what is likely to happen?
In this analysis, we will look at this acquisition from both
financial and technical viewpoints. We will show you some
startling figures and elucidate some of the hidden motivations
behind the scenes. In addition, we will discuss the trepidations
in the technical community and offer our opinions as to whether
these reservations are well founded.
RECAPPING THE DETAILS
=====================
To start, let's quickly recap the details. In early 1990, AT&T
consolidated its Unix operations into a division called Unix
System Operation. In April 1991, they spun off this division
into a separate company named Unix System Laboratories. At
first, all the USL stock was owned by AT&T, but, later in the
year, AT&T sold a minority interest to other carefully selected
companies. At this time, AT&T owns 77% of the outstanding stock,
Novell owns 5%, and 11 other companies (including Sun
Microsystems) own the other 18%.
Novell proposes to buy out all the USL stockholders in order to
own USL outright. But, rather than pay cash, Novell will issue
about 1.1 million new shares of Novell stock and trade them for
existing USL stock. No real money will change hands (we will see
why in a moment). But when all is said and done, AT&T will be
left sitting with stock valued at $100m more than its current USL
holdings.
AT&T will own 3% of Novell's common stock but, according to
Robert Kavner (AT&T Group Executive for Communications Products),
they have "no plans to be involved in USL or Novell's operations
or business decisions."
WHAT NOVELL PROMISES
====================
Novell promises not to change the fundamental orientation of USL.
The official Novell/AT&T press release says: "Novell recognizes
and values the importance of UNIX as an open accessible
technology to OEM partners and customers around the world. As
part of Novell, USL's commitment to fair and neutral access to
UNIX technology will not change."
On the other hand, in another part of the press release, Ray
Noorda (the President and CEO of Novell) makes a conflicting
observation: "This acquisition is being done at the urging of
customers who have asked us to support the UNIX system directly
and integrate it more fully within the Netware environment."
(Is there anyone who actually believes that Novell decided to buy
USL at the urging of Novell's customers? If so, we have some IBM
stock options that you might like to buy.)
THE USL NUMBERS
===============
AT&T is fond of saying that USL has annual revenues "in excess of
$80 million dollars." In fact, the 1992 revenues were $91m. But,
revenues are not profit. How much, if anything, does USL make
from that $91m? Is Unix is a profitable business?
USL is not a public company and they have chosen not to release
their financial figures. However, we were able to obtain the
results for 1989 through 1991, and they do not paint a pretty
picture.
The annual net revenues increased from $58m (1989), to $70m
(1990) to $77m (1991). However, during the same time, expenses
increased dramatically. Research and development went from $28m
(1989), to $30m (1990), to $45m (1991), while sales and marketing
expenses increased even more: $14m (1989), $17m (1990) and $26m
(1991).
The most revealing numbers are the net income. In 1989, USL made
$4m on revenues of $58m. In 1990, they made only $3m on revenues
of $70m. And in 1991, the last year for which we have data, USL
sunk deeply into the red, losing $29m dollars on revenues of
$77m.
The retained earnings (cumulative profit and loss) were $4.7m at
the end of 1990 and -$24m at the end of 1991.
On Dec 31, 1991, USL had $100m in assets, of which $46m was cash.
Whatever is left of these assets will, of course, be taken over
by Novell.
Although the 1992 results are not public, a highly-placed source
at USL tells us that they did make a small profit last year (on
revenues of $92m). Moreover, they still have more than $40m in
cash.
THE NOVELL NUMBERS
==================
By just about any standard, Novell is a strong company. At the
end of their 1992 fiscal year (Oct 31), they had total assets of
$1097m, of which $260m was cash.
Moreover, their liabilities were low. The total current
liabilities were $149m, the minority interest was $8.9m, while
the long-term debt was, remarkably, only $0.5m.
All this yields a shareholder's equity of $938m (about 86% of
total assets) which gives a low debt to equity ratio of 17%.
Or, to put it in plain English, Novell is a wealthy company with
negligible long-term debt and almost $260m cash.
WHY IS THE DEAL STRUCTURED THE WAY IT IS?
=========================================
A company like Novell, with such tremendous assets, has several
choices when it comes to an acquisition. They can pay cash, out
of their own reserves or by borrowing. In fact, Novell has the
leverage to do just about anything it wants. Why then, did they
choose to issue new stock to buy USL?
Our answer is that they bought it for no money down because there
were able to. Although they could afford to pay real money for
USL, they were well aware that it was losing money and AT&T was
highly motivated to make the sale.
You may remember that AT&T's original intention in setting up USL
was to one day spin it off as a separate company. It seems that
USL could not stand on its own and AT&T's only alternative was
sell it. Now, how many companies can afford to buy an ailing
operating system concern? Although Novell could have depleted
its reserves to make the purchase, why should they? By simply
issuing new shares (which, in turn, diluted the equity of the
current Novell shareholders), they could have their cake, eat it,
and keep their wealth.
From AT&T's side the Novell offer is a godsend. True, they do
not get any cash, but they get a big chunk of valuable stock and,
most important, they get to leave the Unix business and stop
supporting the big white Unix elephant.
Do you think it bothers AT&T to jettison Unix? Remember Kavner's
remark: AT&T has "no plans to be involved in USL or Novell's
operations or business decisions." In our minds, AT&T wanted out
and Novell was the White Knight. And when White Knights offer
stock instead of cash, you don't quibble.
CONCERNS
========
The technical community that uses Unix on a day to day basis has
some valid concerns. For example, much of the Unix community is
used to flexible networking under the openness of the TCP/IP
umbrella. Although Novell does support TCP/IP in its UnixWare
offering, the mainstay for its networking (and the bulk of its
business) is provided by Netware's IPX/SPX protocols. Moreover,
NFS, widely used in the world of Unix for resource sharing, can
be viewed as a competitor to Netware.
The main concern, however, is an overriding apprehension that
what's good for Netware may not be good for Unix. True, Novell
seems to be promising that life will go on much as usual. But
there is no gainsaying the fact that Novell is a publicly-owned
company whose primary responsibilities are to its shareholders.
Novell has no compelling reason (nor should it have) to keep on
paying for the fuel that burns in the Unix flame. In the long
run, Novell must make a profit with USL and, if past performance
is any indication, they will make a profit, no matter what it
takes.
As Larry Lytle, the main spokesman for USL puts it: "USL
understands that it is naive to believe that in any merger
nothing changes. The question is what will change and what will
remain unchanged? ...You can expect that Novell is going to run
this as a business and is going to want USL to be profitable.
They are going to have a great deal of influence on the future of
Unix because they are going to influence, for example, how we
spend our money on research and development."
STRANGE CONFLICTS OF INTEREST
=============================
All of which create some interesting conflicts of interest. For
instance, what about all the companies that use Unix to build
products that compete against Novell? They will now have to
license Unix from Novell in order to compete against them. For
example, the Vines operating system from Banyan, a direct
competitor of Netware, is based on Unix. Every time Banyan sells
an operating system, some of the money will go to Novell.
There are many more companies that depend on their Unix licences
just to build their products. It would be unrealistic to not
expect to pay higher royalties in the foreseeable future. After
all, USL has trouble making money but USL under Novell will have
to make money. Moreover, we should assume that future decisions
about Unix will have to take into account what is good for
Novell.
Does this mean that System V-based companies should be concerned
about their future? Absolutely. Maybe not today, or even six
months from now, but somewhere down the road the interests of
Novell will not coincide with the Unix world at large. It is
unrealistic to expect Novell to spend money to develop Unix for
the good of everybody at the expense of their own company.
NEW OPPORTUNITIES
================
Much has been made of the threat that Microsoft and NT might pose
to Unix. The combination of Novell and Unix, the refrain goes,
has a much better chance of countering this threat than USL by
itself. However, such observations ignore the fact that a small
but significant share of the marketplace is best served by Unix
no matter what Microsoft is up to. The many Unix VAR's and
resellers should probably be more concerned with the loss of a
stable, independent source for Unix than with an imaginary NT
monster.
What we see is a brand new opportunity for OSF who, after all,
offers the only large-scale alternative for a vendor-independent
Unix-like operating system. It would be prudent for those Unix
vendors who have not already made the switch to take a strong
look at OSF.
There is also an important opportunity for the Mark Williams
company, who sells their Unix-like operating system (Coherent)
for $99. Coherent can run System V binaries and may provide a
viable, inexpensive basis for VAR's who sell vertical
applications.
THE WINDS OF CHANGE
===================
Although we can't predict the future in detail, we can say that
the winds of change are blowing ever more strongly. Novell is so
rich that the Unix acquisition is relatively small potatoes. One
way or the other, they can afford to do whatever they want.
The financial results for USL seems to indicate that supplying
System V to the world is not a good way to make money. If so,
there is no reason to expect Novell to keep subsidizing Unix out
of altruism.
The trouble is that we live in a part of the world in which many
people depend on Unix -- not to fight Microsoft and NT, but to
earn their living -- and there are too many unknowns. As we see
it, the onus falls squarely on the shoulders of Ray Noorda. As
Novell consummates the deal with AT&T, there should be guarantees
made as to the future of Unix. These guarantees should be in
writing and should be made public. Moreover, Noorda must finally
set up a line of succession and give us some indication of how
Novell (and Unix) will function when he bows out.
It's not that Novell has any moral or financial obligation to be
the keeper of the Unix flame. It's just that people have to make
plans. Vague, contradictory statements of intent are not enough.
It certainly behooves companies dependent on System V to
reevaluate their future.
----- end -----
________________________________________________________________________
________________________________________________________________________
The SURFPUNK Technical Journal is a dangerous multinational hacker zine
originating near BARRNET in the fashionable western arm of the northern
California matrix. Quantum Californians appear in one of two states,
spin surf or spin punk. Undetected, we are both, or might be neither.
________________________________________________________________________
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