Red Hat stock tops $30 mark amid news of Novell play :: Editor's Blog at WRAL Tech Wire

Updated Mar. 5, 2010 at 8:52 a.m.

Red Hat stock tops $30 mark amid news of Novell play

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RALEIGH, N.C. – Speculation is already starting on the Internet that Red Hat (NYSE: RHT) may be in play after one of its biggest rivals received a buyout offer Tuesday.

Red Hat shares climbed more than 2 percent to $29.37 in early trading Wednesday and reached as high as $21.41. By 11:30 a.m., shares hit $29.66, up 91 cents or more than 3 percent. Red Hat ended the day at $29.37, up 60 cents or 2 percent.

On Thursday, shares reached $30.02 - their highest price since Jan. 11 - before falling back to $29.88 at the close.

Red Hat shares hit a 52-week high of $31.76 on Dec. 23.

Elliott Associates LP offered $5.75 a share for the 91.5 percent of shares in Novell (Nasdaq: NOVL) that it doesn’t already own. Novell closed Tuesday at $4.75, but shares jumped immediately to top the Elliott offer to $6.12. Shares traded at that same level in mid-morning action but dipped to $6.02 at 11:30 a.m. They closed the day up 28 percent at $6.08.

The surge indicates investors expect a bidding war to break out for Novell.

Two open source bloggers say a deal for Novell could be a boost for Red Hat.

Matt Asay, writer of The Open Road blog at Cnet and a close follower of Red Hat as well as open source, wrote Wednesday that a Novell buyout would be good for the Linux businesss.

“In sum, Novell's legacy has weighed down its ability to push its Linux business into top gear, a problem that won't afflict likely suitors for that business,” he wrote. “These companies have largely relied on Red Hat to be a counterweight to Microsoft on the OS side. But with a healthy middleware and virtualization business, Red Hat starts to look like a credible threat to Oracle, VMware, and other erstwhile partners.

“All of which positions Novell's Linux business to play a critical role in the software industry. Let the bidding begin.”

Sam Dean, writing a blog at Ostatic, also sees possible positive news for Red Hat.

“Some of the early forecasts for what will happen if Novell is swallowed up are already in,” he said. “Of course, everyone feels that Red Hat will benefit big time, and possibly Microsoft (although Microsoft is actually a Novell partner). But I'm in agreement with Matt Asay that the reality of what may lie ahead could be more complicated. Matt has written many times that Novell's parts are worth more than the whole is valued at, and Elliott Associates pretty much said the same thing in its offer letter …”

Novell shares hadn’t traded as high as $5.75 since September 2008.

Elliott’s offer of $1 billion in cash also stirred interest in Red Hat, which long has been speculated about as a possible takeover target by larger firms such as IBM.

Red Hat shares climbed 37 cents, or 1.3 percent, to $29 in after-hours trading.

Its next quarterly earnings report is due March 24. In its last earnings report in December, Red Hat reported revenues of $197 million and beat Street expectations with a 17 cent-per-share profit.

The Raleigh-based firm, which operates 65 offices worldwide and is the world’s top developer and service provider for open source Linux software and servers, would be a much bigger target than Novell.

Its market cap is $5.4 billion, compared to about $2 billion for Novell, based on the value of the Novell offer.

Red Hat shares are also four times as expensive and recently set a 52-week high of $31.76. Its 52-week low of $12.98 far exceeds Novell’s new high.

The biggest institutional stock holder in Red Hat is Fidelity Investments, with 28.3 million shares, or 15 percent.

Analysts hold a positive view of Red Hat stock. Two rate it a “strong buy,” and another six have it listed as a “buy.” Twelve others list it as a “hold,” according to Thomson First Call.

In a letter to Novell's board, Elliott portfolio manager Jesse Cohn said the offer, net of about $1 billion in cash in the company, implies a $1 billion enterprise value, a 49 percent premium to the company's current enterprise value.

Novell's cash balance represents almost 60 percent of the company's market capitalization, but much of it is overseas "and may not be realized in a tax efficient manner," Cohn wrote.

Elliott began acquiring Novell stock on Jan. 4 and controls about 8.5 percent of the company.

Pointing to its own track record of helping its acquired companies, Cohn said Elliott is "uniquely situated to deliver maximum value to the company's stockholders on an expedited basis" and faulted a recent series of acquisitions and changes in strategic focus at Novell.

A Novell representative said the Waltham, Mass., company had no immediate comment.

Tags: Red Hat, Linux, IBM

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