The letter of intent signed by AT&T and Novell in which they revealed their plans for AT&T to sell Unix System Laboratories (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 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. – Harley Hahn and Rick Stout
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 Unix Labs 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 Unix Labs stockholders in order to own Unix Labs outright. But, rather than pay cash, Novell will issue about 1.1m new shares of Novell stock and trade them for existing Unix Labs stock. No real money will change hands (we will see why in a moment) – but AT&T will be left sitting with stock valued at $100m more than its current Unix Labs holdings. AT&T will own 3% of Novell’s common but according to Robert Kavner (AT&T group executive for communications products), it has no plans to be involved in Unix Labs or Novell’s operations or business decisions.
What Novell promises
Novell promises not to change the fundamental orientation of Unix Labs. The official Novell-AT&T release says: Novell recognises and values the importance of Unix as an open accessible technology to OEM partners and customers around the world. As part of Novell, Unix Labs’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 chief executive 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 Novell decided to buy Unix Labs at the urging of Novell’s customers? If so, we have some IBM stock options you might like to buy…)
The (deteriorating) Unix Labs numbers
AT&T is fond of saying that Unix Labs has annual revenues in excess of $80m. In fact, the 1992 revenues were $91m. But, revenues are not profit. How much, if anything, does Unix Labs make from that $91m? Is Unix is a profitable business? Unix Labs 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, Unix Labs 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, Unix Labs 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 minus $24m at the end of 1991. On Dec 31, 1991, Unix Labs 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 p
ublic, a highly-placed source at Unix Labs tells us that they did make a small profit last year (on revenues of $91m). Moreover, they still have more than $40m in cash.
The (appreciating) Novell numbers
By just about any standard, Novell is a strong company. At the end of their 1992 fiscal year (October 31), they had total assets of $1,097m, 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 $500,000. 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 the deal is drawn up 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 Unix Labs? Our answer is that they bought it for no money down because they were able to. Although they could afford to pay real money for Unix Labs, 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 Unix Labs was to one day spin it off as a separate company. It seems that Unix Labs 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 Unix Labs 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.
