Novell turns down unsolicited offer: What's it worth and who's buying?

Updated: Novell has rejected a $2 billion unsolicited offer from Elliott Associates on the rationale that the buyout proposal "undervalues the company's franchise and growth prospects." So what's this company really worth?

Elliott Associates offered to buy Novell for $5.75 a share, but the offer was conditional. Novell said Saturday that it will review "various alternatives to enhance stockholder value," but that the Elliott offer on the table didn't work. Novell's alternatives include partnerships, dividends, stock buybacks and a potential sale of the company.

In a statement, Elliott Associates said it was pleased that Novell was selling the company and would continue its quest to buy it.

Novell noted that it is committed to enhancing value for shareholders. Here's the 10-year chart that would make even the biggest Novell fan wonder about shareholder value:

Let's face it. Novell is a cash-rich slow---or no---growth company. Novell has a legacy business---NetWare, Groupwise---that still produces nice cash flow via maintenance revenue. But where's the growth?

Novell's SUSE Linux business can show growth, but it runs into the market leader---Red Hat.

Simply put, it's a positive sign that someone wants to take out Novell, but the company is right to question Elliott's motives. The Elliott Associates deal isn't what it appears. Elliott Associates offered to buy Epicor in 2008 at $9.50 a share, but then lowered its bid to $7.50 a share. Elliott in November 2008 terminated its bid. Why would Novell risk a repeat performance from Elliott?

Elliott Associates' conditional offer values Novell at 1.2 times enterprise value and 19 times calendar earnings per share, according to Piper Jaffray analyst Mark Murphy. The total enterprise value of Novell was $1 billion (the company has about $1 billion in cash). "Due to Novell's declining legacy business and challenged competitive position, this marks a discount to our enterprise software group," said Murphy. The wild card in the Novell offer is whether Elliott would stick to its bid.

You can easily argue that Novell should be discounted relative to its peers, but the question is by how much.

Novell's financial results all kind of blend together. Ho-hum quarters with a dash of flattish at best revenue.

And the annual results:

As for Elliott Associates, the investment firm may have already accomplished its goal, which was to put Novell in play. Elliott Associates isn't known as an operator so it's unclear how serious it really is about buying Novell outright.

Will Novell find another buyer or white knight? It's unlikely.

"Over the last two years, we have been questioned by both private and public companies about Novell but it has been over 9 months since we've had this type of inquiry," said Jefferies analyst Katherine Egbert in a recent research note. "This leads us to believe that there is no active process to sell the company at the current time. We don't see a natural buyer. But any large software or systems vendor with a track record of successfully stripping costs out of a low-growth company or whose business model consists of low-growth maintenance revenue could be interested."

Other analysts go along with that assessment. Benchmark analyst Brent Williams said that Novell's problems are structural and the only way it can turn around is to spend on sales and research and development to keep customers from leaving legacy products like NetWare and win new business.

Add it up and Williams noted that Novell is a multi-year fix-it project. It's doubtful any acquirer has the patience.