From: harley@engrhub.ucsb.edu (Harley Hahn)
Newsgroups: comp.unix.questions
Subject: The Novell/AT&T agreement to sell Unix
Message-ID: <7345@ucsbcsl.ucsb.edu>
Date: 13 Jan 93 05:20:09 GMT
Lines: 292

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.
 
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