Which white knight will save Novell?

Speculators seem convinced that another IT vendor, lured by Novell Inc.'s Linux and other open-source software assets, will top $5.75/share cash offer Monday's $2 billion offer by hedge fund, Elliott Associates.

Though Elliott insists that isn't its strategy, another buyer could result in a nice payday for Elliott, which began buying up Novell stock only in early January.

A rival buyer would guarantee at least $75 million in profit for Elliott's 8.5% stake -- not bad for two month's work.

So who are the most likely suspects? IBM tops the list. The company is probably the biggest proponent of open-source software out there, such as Novell's Suse Linux, which holds about a third of the Linux server operating system market, the rest held by Red Hat Inc.

Who will get Novell?

"IBM could use its own Linux distro and x64 hypervisor as well as the systems management and identity management tools that Novell has taken possession of over the years," opined The Register, "and it knows how to ride down a legacy software business like NetWare."

An IBM-Novell merger has been suggested before. "Red Hat's dominance leaves IBM almost entirely dependent upon SuSe/Novell," wrote Sun Microsystems Inc.'s then-COO Jonathan Schwartz in 2004. "Whoever owns Novell controls the OS on which IBM's future depends."

The Register also pitched Citrix Systems Inc. and SAP AG as other potential buyers.

The remote access and desktop virtualization vendor "could use its own Linux distro and some of the physical and virtual server management tools Novell has, too," it said. SAP, meanwhile, "needs to compete with Oracle with a complete stack of software [and] could also make good use of SUSE Linux and start weaving together a software stack of its own that runs on x64, Power, Itanium, and mainframe iron."

CNET blogger and Canonical COO Matt Asay, a former Novell employee, likes IBM, Oracle Inc. and VMware Inc. as potential buyers.

His reasoning? All three of these firms are feeling uncomfortable about their dependence on Red Hat Linux to counterbalance Microsoft's Windows Server -- especially now that Red Hat is competing with them in middleware and virtualization software. And all three are profitable firms with apps that would complement Novell's.

"Novell's legacy has weighed down its ability to push its Linux business into top gear, a problem that won't afflict likely suitors for that business," Asay wrote.

What about Microsoft? Novell is a key partner for Microsoft in targeting the enterprise data center. But with Windows Server's nearly 75% market share, anti-trust issues would seem to get in the way.

Despite all of these intriguing possibilities, Wall Street is surprisingly dour on the possibility of another bidder emerging.

"We don't see a natural buyer," said Jeffries & Co. Another firm, S&P Equity Research was more blunt: "We doubt that a white knight will appear."

Some, such as Benchmark Co., foresee a long boardroom battle between Novell and Elliott, with the latter failing to prevail.

“Investors should be set for a long battle, which we ultimately believe will end up at best at a stalemate with Elliott taking one or more board seats and remaining in a holding pattern," said Benchmark, reported Barron's.

If Elliott does somehow get control, that worries my colleague Steven J. Vaughan-Nichols. He points to Elliott's track record as a 'vulture fund' buying up distressed assets, including the bad debt of third-world countries.

"What I fear will happen, is that they'll take the cash -- if Elliot Associates are good at anything it's getting the cash -- and then slash and burn the rest of the company," he wrote. Novell has about a billion dollars in cash.

Benchmark implicitly endorsed that point-of-view, when it said it doubted Elliott had "enough experience to operate such a complex business [Novell]" for the long haul.

On the other hand, Elliott doesn't have a track record of carving up its high-tech acquisitions like a bird on Thanksgiving.

It led a group that bought barcode maker Metrologic Instruments Inc. in 2006 for $420 million. Two years later, it flipped Metrologic to Honeywell for $720 million.

Last year, Elliott joined other funds in buying engineering software maker MSC Software Corp. for $360 million and taking it private. The company appears to remain intact and Elliott remains an investor.

So what do you think is in store for Novell?

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