Thursday, November 25, 2010

Attachmate, Novell and the sale of 882 patents to CPTN Holdings, a consortium organized by Microsoft

On Monday I attended a European Commission and European Patent Office conference on intellectual property rights and standardization (I blogged about it) when the long-awaited acquisition of Novell was announced. I received questions about it but for lack of information wasn't able to say anything of substance at that point.

Relatively speaking, it's easier to comment on new patent suits because once one obtains a copy of the complaint, there are usually various aspects worth looking into.

Just so you're not disappointed if you read further: there still isn't anything spectacular or dramatic about this Novell transaction and I guess there never will be. But it is an important deal for open source, so I'll sum up what I've read and what I think so far. Let's talk about the projects first, then the patents.


Miguel de Icaza, a Novell vice president who started the Mono project (a FOSS implementation of the .NET API) and previously founded the GNOME project, reassured the Mono community with this tweet:

"After the Novell acquisition, Mono continues as-is, but our paychecks will come from Attachmate instead of Novell."

A few months ago I disagreed strongly with Richard Stallman after I read an interview with Glyn Moody in which RMS said that developers "shouldn't write software to use .NET. No exceptions."

I don't know if any of those Mono critics will restate their baseless concerns, but at any rate, I believe that the acquisition of Novell is positive for Mono. It ends a period of uncertainty for the brilliant team Miguel leads. Miguel's blog indicates that they are being very productive these days.

SUSE and openSUSE

I remember the time when SUSE was capitalized differently ("SuSE") and often spelled with dots ("S.u.S.E."). That German Linux distribution used to be much more popular in Europe than Red Hat Linux. At an online gaming startup I co-founded and managed in the late 1990s, we used SuSE on our servers. I also ran SuSE on a computer at home (for MySQL).

Later, SuSE was acquired by Novell and renamed "SUSE" because people struggled with the lowercase "u" in the middle of an otherwise all-caps name although the SuSE team liked that kind of silhouette: they named one of their key differentiators YaST ("Yet another Setup Tool"). SoME SeEM To LiKE ThAt.

A few months ago I blogged about IBM's discriminatory pricing strategy in the mainframe business and mentioned z/Linux, the mainframe version of Linux. SUSE has been the market-leading mainframe Linux distribution all the time and still has a market share of 80% (worldwide).

I'm sure that SUSE is a pretty substantial part of the value that Attachmate saw in the acquisition. There's a lot of potential to narrow the gap between SUSE and Red Hat. For a company that doesn't own much intellectual property, Red Hat's margins are unbelievably high, suggesting to me that SUSE has a world of opportunity if it executes well. An open source model doesn't guarantee low prices all by itself: market dynamics still depend on effective competition.

Attachmate has already emphasized that SUSE will be run as a stand-alone business unit, and that the openSUSE community project "is an important part of the SUSE business" and "no change to the relationship between the SUSE business and the openSUSE project" is expected as a result of this deal. Pascal Bleser, a leader of the openSUSE project, writes on the official openSUSE blog that "the openSUSE Project has had, since its beginning, a very vibrant cooperation with Novell, especially with Novell’s SUSE business". Now he and his team "are looking forward to continuing this once Novell and SUSE become part of Attachmate!"

882 patents to be acquired for $450 million

My focus on this blog is on how patents get used -- from an open source angle -- and not on the secondary market for patents. But I do know that numerous patents are on the auction block all the time: some are sold individually or in smaller packages, others are sold in large blocks. Deals come in all sizes. For example, a Morgan Stanley analyst estimated six months ago that a portfolio of 4,500 Nortel Networks patents and 1,000 patent applications was worth in excess of $1 billion.

The structure of the Novell deal appears to be such that Attachmate pays $6.10 in cash per share of Novell (NASDAQ:NOVL) shareholders, a total of approximately $2.2 billion. Since Novell has, according to certain reports, cash of approximately $1 billion in the bank, this means an "enterprise value" of approximately $1.2 billion. The price to be paid already takes into consideration that a Delaware company named CPTN Holdings LLC will acquire "all of Novell's right, title and interest in 882 patents [...] for $450 million in cash" (I quoted from the SEC filing related to the acquisition, to which the merger agreement is attached).

A list of those patents is not available. Some have pointed out that 882 is a greater number than that of all patents registered in Novell's name with the USPTO. This led some to believe that the number includes some patent applications, and it may. It's also possible that Novell acquired the ownership of some patents that have not yet been re-registered in its name.

But the one piece of information that could make a major difference is whether that count relates to 882 patented inventions or 882 per-jurisdiction patents. Software patents are granted in almost all of the industrialized world. In an analysis of international equivalents of patents over which Apple, Paul Allen's Interval Licensing and Oracle are suing other companies, I gave examples. I found that a certain Apple touch-screen software patent was filed for in the United States, Canada, China, South Korea, Japan, Australia, and 34 European countries. Depending on the approach, this could count as 1 patent, 7 patents (if Europe counts as one patent because of a centralized examination process at the EPO) or as 40 patents (since an EPO patent is a bundle of national patents, each of which results in additional costs, gets a separate patent number and would have to be enforced separately in its jurisdiction with potentially different outcomes; the number of countries in which an EPO patent actually gets registered varies greatly, with the 34 countries in that example being close to the maximum).

Financial structure: $2.2 billion for Novell minus patents plus $1.4-$1.5 billion

Attachmate offers to lay down $2.2 billion in exchange for a company that will, following the patent sale, have $1.4-$1.5 billion in the bank. That makes the transaction more affordable, and NOVL shareholders benefit because they will get to sell their stock at a price that is 28% higher than before a hedge fund named Elliott Associates (which already held a chunk of Novell shares at the time) made a buyout proposal. Attachmate's offer is 9% higher than the closing price on the last trading day before the Attachmate-Novell announcement.

Wall Street clearly believes in this deal. Yesterday NOVL closed at $5.93. This means that investors buying the stock now will -- all going well -- realize a 3% gain, which is a good deal for the "arbs" (risk arbitrageurs) if the deal closes quickly. They need a certain margin since every once in a while a deal may fall through for whatever reason and then they may have to sell their holdings with losses. A 3% margin so shortly after the announcement suggests that those professional speculators expect the deal to close on those terms relatively quickly. It's a nice margin for a virtually certain quick flip but wouldn't make sense otherwise.

It's also a good sign that Elliott -- whose buyout offer got the ball rolling earlier in the year -- "will become a shareholder of Attachmate under the latest offer" (as reports). Some thought Elliott's offer in the spring wasn't serious and was just meant to force a sale. However, by putting its money where its mouth is, that hedge fund shows it really believes in the longer-term value of the combined company and wasn't merely looking for an exit strategy concerning Novell.

In this financial context, let me restate a disclosure I previously made in connection with possible investments in mainframe software companies: at the time of publication of this posting, I do not own stock (or related derivatives) in any of the companies mentioned.

Patent holding consortium organized by Microsoft

The fact that Microsoft organized CPTN Holdings LLC, the consortium that agreed to buy those 882 patents, has made waves in the media. I have seen worries expressed over this fact in articles by Steven J. Vaughan-Nichols ("Dark horse Attachmate buys Novell, Microsoft helps"), Dana Blankenhorn ("Novell sale shows its control by Microsoft"), Katherine Noyes ("Microsoft's Hand in Novell Deal Bodes Ill for Linux"), Rob Enderle (who sees Red Hat and Google as "first targets" of a "creative" IP strategy), and Timothy Prickett Morgan, who asked:

"Novell shareholders have to wait to see exactly what Attachmate is selling off to Microsoft and then ponder the deal. Wouldn't it be funny if Microsoft ended up owning whatever rights to Unix that Novell thinks it has?"

The wait-and-see approach is right. Actually, the other journalists -- all of whom I really respect -- also made it clear where the facts end and their gut feelings begin.

CPTN Holdings LLC is a consortium organized by Microsoft but involving other "technology companies". Names, numbers and the allocation of shares are unknown at this stage, but it's certain that the decisions of the consortium will not be taken by Microsoft singlehandedly. That fact should actually give a lot of comfort even to those who don't want to trust Redmond.

No big difference

I previously commented on Microsoft's cooperative approach to patents and still can't see any reason to be particularly concerned about. (I could, however, put together a whole list of other patent holders I would be uneasy about.) Microsoft's dispute with Motorola is just one of many in the smartphone context. So even if Microsoft bought those patents directly as opposed to being just one of several shareholders of CPTN Holding LLC, I wouldn't be concerned.

Mary Jo Foley, famous for her intimate knowledge of Microsoft, looked into "Microsoft's role in the Novell-Attachmate deal" and quoted Horacio Gutierrez, Microsoft’s Corporate Vice President and Deputy General Counsel of Intellectual Property and Licensing, with a business-as-usual statement.

I just want to be rational. The prospect of a company that already owns about 15,000 US patents -- and uses them pretty reasonably -- acquiring indirect, partial ownership of hundreds more doesn't set off an alarm on my end. At their current rate (roughly 3,000 new US patent applications a year) they file for that number of new patents every quarter, and I'm sure many of those -- as well as many patents obtained and held by countless others -- read on some open source software.

Software patents are a fact of life. Even if all of those 882 patents were invalidated overnight, the patent threat to open source wouldn't be diminished in any noteworthy way.

I also don't subscribe to theories that the Open Invention Network plays any role in this transaction. The OIN doesn't appear to impact anything too much. I have yet to see a single verifiable success story involving the OIN. My guess is that Attachmate will look at all of the partnerships Novell has in place, continuing with those that deliver tangible value and revisiting those that don't. The patents that are sold to CPTN Holdings LLC will be outside the scope of the OIN, but that could happen to the patents of any other OIN member or licensee. Other OIN companies, especially IBM, are far bigger patent holders than Novell.

A year ago I warned against the acquisition of MySQL by Oracle. The FOSS community was divided, but today hardly anyone describes Oracle as a good steward of the open source assets it acquired. Some argued that the acquisition was a way to prevent Microsoft from acquiring Sun's patents and using them against open source, but Oracle's suit against Google proved that preference completely wrong.

I will continue to watch this process, of course, and I will discuss relevant new information if and when it becomes available.

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