Date: Thu, 21 Jan 93 16:02:51 PST Reply-To: Return-Path: Message-ID: Mime-Version: 1.0 Content-Type: text/plain 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 |____________________________________________________ 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. ________________________________________________________________________ Send postings to , subscription requests to . MIME encouraged. Xanalogical archive access soon. Atonal punk reggae scored for gamelan. ________________________________________________________________________ ________________________________________________________________________ EFBIG 27 File too large The size of a file exceeded the maximum file size (1,082,201,088 bytes).