Shares of enterprise software concern Novell (NOVL) are trading up sharply after hours, after multi-strategy Elliott International put out an offer to acquire the entire company for $5.75 per share. Elliott will now reap an instant windfall from the shares they've recently purchased between 4.30 and 4.75 in recent months.
Based on 2007-2009 Free Cash Flow numbers, the company certainly doesn't look worth buying. If 2010 does not have a repeat of huge one time costs, Free Cash Flow should increase. But the reason Elliott got involved is due to Novell's big, lovely, stable software licence and maintenance revenue and associated gross profits:
Those lovely gross profits are destroyed by the firm's incredibly fat and bloated operating structure. Sure, a bit of it is capitalized expenses - to be recouped on the cash flow statement - but it is a horrible operating structure nonetheless. That's where private equity steps in - when there's too much fat between gross profits and free cash flow. A glaring example of the injustice done by management is the valuation accorded other software firms with similar gross profit dollars. Taking market value net of cash, Novell trades at a truly embarrassing discount to the firms earning similar gross profits:
It will be interesting to see what happens here. Elliott International has been a shareholder for literally days, something that won't exactly win them favor with management. The letter they shared today does not cite a commitment to finance this deal, and they are quite clear about this being a very "casual" buyout offer. I'm left to wonder if they're actually serious about buying the company, or if they simply amassed a big stake and then launched this campaign to draw attention to management's under-utilization of this company's profit potential. The best outcome for Elliott - in my view - is interest from other parties or a big new cost-cutting commitment from management.
Here's Elliott's letter. It's rather cute that Elliott refers to the buyout's premium compared to "the last trading day before we commenced buying Novell's common stock," which of course is of absolutely no concern to anyone but Elliott International.
But hey, good luck to them, well done so far...
The Board of Directors
404 Wyman Street, Suite 500
Waltham, MA 02451
Attention: Richard Crandall, Chairman
Attention: Ron Hovsepian, Chief Executive Officer
Dear Members of the Board of Directors:
I write to you on behalf of Elliott Associates, L.P. and Elliott International, L.P., which collectively own, or have an interest economically equivalent to, 8.5% of the common stock of Novell and are currently one of the Company's largest stockholders. Elliott is a multi-strategy investment firm with over $16 billion in assets under management focused on employing detailed research to address complex investment situations.
Based on our detailed review of the Company's publicly available information and our substantial knowledge of the software industry, we are pleased to submit this proposal to acquire all of the shares of common stock of Novell for a cash price of $5.75 per share. This price represents a premium of 49% over the Company's current enterprise value and 77% over the Company's 90-day volume-weighted average enterprise value. As the Company's cash balance of nearly $1.0 billion represents almost 60% of its current market capitalization, we believe that a premium to enterprise value represents the most meaningful measure of the value that our proposal offers stockholders, valuing the Company's cash at 100 cents on the dollar despite the fact that a significant portion of that cash is overseas and may not be realized in a tax efficient manner. Importantly, this price represents a premium of 115% over the Company's enterprise value on January 4, 2010, the last trading day before we commenced actively acquiring Novell's common stock This price also represents a 37% premium to Novell's closing stock price on January 4, 2010 and a 20% premium to Novell's closing stock price yesterday. By any measure, we believe our proposal represents a compelling opportunity that your stockholders will find extremely attractive.
Novell is a long-established company that we have followed closely for a considerable period of time. Over the past several years, the Company has attempted to diversify away from its legacy division with a series of acquisitions and changes in strategic focus that have largely been unsuccessful. As a result, we believe the Company's stock has meaningfully underperformed all relevant indices and peers. With over 33 years of experience in investing in public and private companies and an extensive track record of successfully structuring and executing acquisitions in the technology space, we believe that Elliott is uniquely situated to deliver maximum value to the Company's stockholders on an expedited basis.
Our proposal is subject to a confirmatory due diligence review of the Company and negotiation of definitive documentation. We are available to sign an appropriate confidentiality agreement and commence our due diligence review immediately. Elliott is prepared to devote considerable resources to completing this transaction and we are confident that, with your cooperation, we will be in a position to execute a definitive transaction agreement on an expedited basis. While we intend to work with financing sources, obtaining financing is neither a condition of our proposal nor a condition to completing the transaction.
We are prepared to meet immediately with you and your advisors in order to answer any questions about our proposal and to work out the details for moving toward a definitive transaction agreement. We also look forward to discussing with management its role with us going forward.
Of course, nothing in this letter is intended to create a legally binding obligation and no such obligation will exist unless and until a definitive transaction agreement is executed. As a result of our substantial share ownership in Novell, SEC rules oblige us to make the existence and contents of this letter public. Please feel free to contact me at (212) 506-2999 to discuss or clarify any aspect of this proposal.
On behalf of Elliott, we are very much looking forward to working closely with the talented employees of Novell to bring the Company forward to its next phase of growth.
Very truly yours,
Jesse A. Cohn
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