Novell faces massive changes

Novell is expected to initiate a major round of layoffs that could cut 1,000 or more jobs in an attempt to restore the software company's financial strength, according to employees familiar with the plan.

The layoffs are expected to hit about 20 percent of the company's 5,800 employees and is likely to be announced near the end of Novell's fiscal year, which ends Oct. 31, sources said.

Novell is under increasing financial pressure, particularly after the company reported third-quarter results in August in which revenue dropped 5 percent to $290m (£163m) and profits dropped 91 percent to $2.1m.

The loudest call for reform came from Blum Capital Partners, which owns more than 5 percent of the company's stock. Blum has urged major changes for months, including new top management, a greater emphasis on Linux and sales of several divisions. Credit Suisse First Boston analyst Jayson Maynard also called for major changes in September, including new management.

Novell declined to comment for this story, though it has indicated it agrees with its critics' assessments in some ways. In September, the company announced plans to buy back its stock, a move Blum and Maynard both advised.

And in a 4 October response to Blum disclosed in a regulatory filing, chief executive Jack Messman indicated cuts were coming: "Our cost structure will be better aligned to our strategy as part of our 2006 fiscal year planning."

That statement came not long after the company's disappointing third-quarter financial results, during which Messman also said cost-cutting is on the way: "I think we still need to make some operational enhancements to our business and to our corporate functions and in the field, which will lead to further cost reductions and efficiencies."

Celerant, a Novell consulting subsidiary, is a definite candidate for divestiture.

"As we have often publicly stated, we view Celerant as a non-core business. We envision Celerant being separated from Novell in some fashion when market and other conditions are appropriate," Messman wrote to Blum in a June letter disclosed in a regulatory filing.

Other cuts are likely too.

One source said the cuts almost certainly will hit Novell's Extend product line, software based on the application server Novell obtained when it acquired SilverStream Software in 2002. And Novell is likely to pull back from regions where it hasn't been successful, leaving sales to business partners that resell the company's products.

Since Microsoft undermined Novell's core business selling the NetWare server operating system, the company has sought to transform itself for years. It embraced open source software, chiefly Linux, through its $210m acquisition of SuSE Linux in 2004.

Blum called for Novell to sell its GroupWise division, which sells email and calendar software, and its ZenWorks division, which sells management software. But in the 4 October response, Messman indicated neither move is likely.

"While GroupWise today is under significant competitive pressures, a move to an open source offering will help us revitalise this category," he said, referring to the Hula project Novell launched in February. And of ZenWorks, he said, "The ability to manage cross-platform systems will continue to be a key differentiator for Novell. ZenWorks is the foundation upon which we will expand our world-class IT system management capabilities."