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Sun's Disruptive Acquisition: Novell

Sun Microsystems' mere suggestion that it could buy Novell is raising more than red flags in the IT industry.

In an interview with the Wall Street Journal this weekend, outspoken Sun COO Jonathan Schwartz said the company was wondering what to do with its $7.61 billion cash in the bank.

"With our balance sheet, we're considering all our options," he said when asked about purchasing Novell.

But Schwartz followed it up with a statement that begs the argument of why Sun would spend upwards of $2.64 billion for the owner of enterprise Linux distribution SUSE.

"What would owning the operating system on which IBM is dependent be worth? History would suggest we look to Microsoft for comparisons," Schwartz said.

Michael Dortch, principal business analyst with Robert Frances Group, suggests enterprise IT executives might have several questions regarding a Sun acquisition of Novell.

"Would Scott McNealy and Jack Messman actually try to run the resulting company together? Would key developers from either Novell or Sun stick around, or leave? What would be the ultimate effects on current and anticipated offerings, from Novell and from Sun?" Dortch asked.

This is where the fur starts to fly. In his latest corporate weblog, Schwartz was hypercritical of IBM , noting that Big Blue is having problems with its Linux strategy because Red Hat is raising its prices and adding an application server that competes with WebSphere.

"IBM's finding itself in the uncomfortable position of having lost control of the social movement they were hoping to monetize," Schwartz writes on his weblog.

"Red Hat's dominance leaves IBM almost entirely dependent upon SUSE/Novell," he continues. "Whoever owns Novell controls the OS on which IBM's future depends. Now that's an interesting thought, isn't it? But if IBM preemptively acquires Novell/SUSE, the world changes: Linux enters the product portfolio of a patent litigator not known for being a social-movement company. But where else will IBM go? With its current market cap, Red Hat seems un-acquirable -- but absent action, IBM's core customers will be eroded by Red Hat's leverage. And Sun's ability to leverage our open Solaris platform (on industry standard AMD, Intel or SPARC), or Java Enterprise System, even on IBM's hardware, gives us a significant -- and sustainable -- competitive advantage."

Representatives with IBM and Novell declined to comment for this article, citing refusal to make statements based on rumors. A Sun spokesperson would not expand beyond Schwartz's comments.

Yankee Group Senior Analyst Dana Gardner told internetnews.com relationships between IBM and Red Hat couldn't be better and Sun's COO is up to more mischief than market positioning.

"For Schwartz to talk about an acquisition potential is very unusual," Gardner said. "If Sun were truly interested, they wouldn't say anything, because it jacks up the price of whatever company they are going to buy. More likely it is trying to show weakness for IBM on the opening day of the LinuxWorld conference."

Beyond the hype, Gardner also points out that Sun has very little to gain from Novell. The two companies have overlapping customer accounts and product line-ups, such as their directory system (NDS vs. LDAP), network operating systems (Solaris vs. NetWare), as well as messaging and portal products. If anything, Gardner suggests Sun's only interest in buying Novell or SUSE would be taking something off the market.

But does IBM need to purchase Novell and/or SUSE to keep its Linux edge? Again no comment from IBM execs, but RedMonk Senior Analyst Stephen O'Grady suggests there is a very clear logical progression here from Schwartz' perspective.

"His contention seems to be A. IBM needs to buy Novell to gain some measure of platform control it has ceded by relying on third-party OS's; B. IBM would face a customer and community backlash if it did so; and thus C. Sun, by acquiring Novell, would not only gain a very nice complementary product line, but damage IBM in the process. Not a bad day's work," O'Grady told internetnews.com.

Dortch also considered the fact that IT executives at the enterprise level who are reliant upon IBM Linux or open source offerings or initiatives would likely have questions as well.

"Given that IBM has apparently thrown its lot in with SUSE and not Linux market leader Red Hat, will IBM change its mind if SUSE offerings becomes Sun offerings?" O'Grady asked. "How will this affect enterprise deployments -- and the enterprise adoption rates for Linux and other open source solutions?"

But in the end, either company deciding to purchase Novell would meet harsh criticism and scrutiny.

"IBM, if faced with the proposition of Sun acquiring Novell, would do everything in its power to prevent this from occurring," O'Grady said. "And as far as the community is concerned, I think the reaction would be, if anything positive, although [Schwartz's] point about customers is well taken. They would likely be very wary of such a deal."

Sun's shareholders would also be likely to balk at spending so much for Novell or SUSE. Many remember Sun's $2 billion purchase for Cobalt back in September 2000, which did not turn out the way that Sun had hoped.