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Don't Quote My Blog on That

By Steve Rosenbush It's usually the reporters who stir up speculation about potential corporate mergers and acquisitions, while the grey suits in the corporate world sternly remind the media that they don't comment on such matters.

This natural order was upended on Aug. 1, when a senior executive at hardware and software maker Sun Microsystems (SUNW) whipped up speculation that Sun would acquire software maker Novell (NOVL). In his Aug. 1 posting to Jonathan's Blog, Sun President Jonathan Schwartz noted that whoever owns Novell holds the key to IBM's (IBM) future.

"INTERESTING THOUGHT." Why? IBM, the computing giant, is increasingly dependent on another outfit, Red Hat (RHAT), which produces software for IBM servers (see BW Online, 8/4/04, "Red Hat in Big Blue's Space"). This situation, Schwarz says, is similar to the bad old days when IBM unwisely allowed an obscure startup in Redmond, Wash., to produce the operating software for its new line of personal computers. The startup, Microsoft (MSFT), went on to dominate the computing world, while the once-regal IBM was doomed to years of tedious rethinking, rightsizing, restructuring, and other forms of penance at the hands of pit-bull turnaround artist and CEO, Lou Gerstner.

To avoid repeating the catastrophe of yesteryear, IBM is now trying to steer its customers to products that compete with Red Hat's -- Novell and Big Blue's SuSe software. "Red Hat's dominance leaves IBM almost entirely dependent upon SuSe/Novell. Whoever owns Novell controls the (operating system) on which IBM's future depends. Now that's an interesting thought, isn't it?" Schwartz said. He concluded by suggesting that IBM might acquire Novell, which has a market cap of $2.6 billion.

The following day on Aug. 2, media reports entertained the possibility that Sun might attempt the takeover, while cautioning that no negotiations between the companies had been held. Nonetheless, Novell's stock jumped 6.3%, to $7.27, although they fell back nearly 5% on Aug. 3, to $6.92.

PUBLICITY STUNT? Having stirred up the takeover tempest, Sun now has suddenly dropped the issue. A corporate spokeswoman referred the matter on Aug. 3 to Citigate, an outside public-relations firm. Citigate spokesman Noel Hartzell said Schwartz wasn't "available." And he cautioned that Sun "does not comment on rumors or speculation." Novell did not return calls for comment.

Some experts might have characterized Schwartz's blog posting as a publicity stunt. After all, the episode coincided with the opening of the annual LinuxWorld trade show in San Francisco. Trade shows tend to bring out the showy side of even the most staid or perhaps struggling companies.

The situation isn't that simple, though. Clearly, Sun must find a way to shift more of its business from the commodity-hardware business to higher-margin software and services. "Sun has to do something. They know their future is in software," analyst Bill Whyman of independent researcher The Precursor Group says.

DIFFERENT WORLD. Novell, with its business in security and Web services, would make a sound partner. So would an application developer like BEA Systems (BEAS). Moreover, the idea of a Sun-Novell combination has merit. Meantime, the software industry is in the midst of a major round of mergers. With nearly $8 billion in cash, Sun could emerge as a big player in that consolidation.

However, if Sun executives think their company is going to build itself into the next Microsoft by supplying software for IBM products, they're probably going down the wrong path. The world is very different now than it was back when Microsoft took advantage of a unique opportunity to create a monopoly, becoming the first player in a crucial new software market.

Sun already shares the stage with a host of competent rivals. At most, the deal would help Sun survive in a market where companies will endlessly scramble for narrow and fleeting advantage. Stay tuned to Jonathan's Blog. Rosenbush is a writer for BusinessWeek Online in New York

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