Novell To Buy SuSE Linux For $210 Million

The move may help make Linux more attractive for data-center operations.
Novell said Tuesday it will acquire SuSE Linux AG, one of the leading distributors of the open-source operating system, for $210 million in cash. The move could help make Linux a more compelling choice for the data center, as well as potentially put Novell back in the black financially. It also means Novell will once against be competing with Microsoft.

The proposed transaction is the latest step along the Linux path that Novell laid out in March when the company first said it would develop its enterprise services to run on the Linux kernel. If the deal wins regulatory approval, it's expected to close in January.

SuSE doesn't come without strings, however. While some of those strings, such as SuSE's UnitedLinux partnership with Novell adversary SCO Group, are potentially troublesome, other strings have already paid off. Novell said Tuesday that IBM plans to make a $50 million investment in Novell convertible preferred stock and will continue to support SuSE Linux running on IBM's servers and with IBM middleware.

SuSE is expected to benefit by expanding its appeal beyond its home base in Europe and into North America through Novell's established sales channels. "Novell has 80% of the Fortune 500 as customers, and we expect many of them will buy from Novell and SuSE," Novell chairman and CEO Jack Messman said at a press conference. Messman is on his second tour of duty as Novell's CEO, having come back to the company in 2001 when it acquired service provider Cambridge Technology Partners.

Novell's acquisition of SuSE is consistent with the path Novell has taken this year, says John Enck, a Gartner VP and research director. "They now have much better access to one of the biggest Linux distributions," he says. "SuSE, meanwhile, has [gained] a pretty aggressive sales channel into North America."

Novell's commitment to work Linux into a viable data-center operating system follows a similar message that Red Hat Inc. articulated a few weeks ago with the release of Red Hat Enterprise Linux 3. The latest version of Red Hat's operating system features modular file-clustering software and developer tools to provide a more-complete enterprise Linux package.

Novell in June introduced Nterprise Linux Services to give companies file, print, messaging, directory, and management services in a package supported on the Red Hat Enterprise Linux and SuSE Linux Enterprise Server operating systems. With SuSE in the fold, Novell will be able offer a fuller Linux environment. "The operating system was the missing piece," Novell vice chairman Chris Stone says. Novell will position SuSE as its preferred operating system, although the company will continue to support Red Hat for the foreseeable future.

While Gartner's Enck says the addition of SuSE will help Novell challenge Microsoft in the area of enterprise services, Stone insists Novell didn't make the acquisition to compete with Microsoft. "Our goal isn't to go out and replace Microsoft on desktops and servers," he says. "Our objective is to reduce impediments to Linux in the enterprise." Stone admits that he sees some opportunities for Linux as companies migrate from Windows 95 and 98.

Novell plans to preserve the SuSE brand name, as it has done with previous acquisitions Cambridge Technology Partners and, more recently, Ximian Inc. Novell in August bought Ximian for its suite of desktop Linux software. Novell expects SuSE to add 399 employees and as much as $40 million in revenue to its bottom line in 2003 and to have a neutral effect on Novell's earnings per share for 2004.

Messman expressed his wish that SuSE CEO Richard Seibt would remain on as a part of Novell, but the two CEOs don't appear to have a clear plan beyond the closing of the acquisition. Seibt said only that "Novell has my full commitment to making the merger a success."

Neither Messman nor Seibt believes the acquisition of SuSE will have much of an impact on the lawsuits involving SCO Group, IBM, and Red Hat. SuSE is a partner with SCO Group in the UnitedLinux organization, and Messman said Novell would honor all of SuSE's commitments to UnitedLinux.

Where the union of Novell and SuSE could be most challenging is in the hearts of open-source loyalists, Enck says. "Novell is a proprietary vendor, so they first have to win the trust of the open-source community," he says. "For now, it's critical that Novell keep the SuSE brand."

The model for Novell to follow is IBM, which made a commitment to Linux a few years ago that has been well received by Linux loyalists, Enck says. "IBM has made a lot of investments in open-source development," he says. "Novell has to prove that it's committed to contributing to the open-source community and not just taking from it."

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