Who owns what in the Novell deal

We're beginning to see who owns Unix and other intellectual property in the Novell deal. Hint: Microsoft did just fine for itself. The bare facts of the matter are that the almost forgotten software company Attachmate has bought Novell and Microsoft played a large, perhaps critical, role in the Novell acquisition. We don't know a lot more than that, but we are beginning to get a fuller picture of what's what in the Novell deal.

First, Unix's intellectual property (IP) remains with Novell. That's the good news. The bad news is that Microsoft still has ended up with, via the mysterious CPTN Holdings LLC company, owning 882 of Novell's patents, and perhaps, as you'll see shortly, much more besides.

So while, yes, it's good that Unix's copyrights don't end up in Microsoft's hands, there are still many other issues ahead to concern Linux fans.

While I'm no lawyer, I have friends who are, such as Andrew 'Andy' Updegrove, a founding partner of Gesmer Updegrove, a top technology law firm. In his latest blog, Updegrove describes how the Attachmate/Novell merger will work in layman's language.

The deal itself is a "reverse triangular merger." That means that Novell, the "acquired company continues its corporate existence, since in a merger the parties are free to designate which company will be the 'surviving corporation.' Attachmate will therefore form an empty shell company before the closing, all of whose shares will be owned by Attachmate. On the closing date, that company will merge into Novell, rather than the other way around."

Why would they do it that way? Well, there are usually two reasons. The one that seems important here is, "It will lessen a major headache under other structures, which is getting the permission of many hundreds of third parties to assign their contracts from Novell to the acquirer. While every company seeks to limit the number of contracts that it signs that require such permissions, granting this term is sometimes unavoidable (and especially if you want the same right in return). Since Novell will be the surviving legal entity."

Therefore, Updegrove continued, "As a result of this structure, all of Novell's existing contracts, licenses, debts and other legal rights and obligations will continue as they were before the transaction occurred."

That's good news for Novell's customers. At the same time though, the financial side is not as sweet for Novell stockholders as I, and many others, first thought. Updegrove explained:

Elliott's original offer was $5.75 a share, and that was for all of Novell. But as noted later in the 8-K, 822 patents will be broken out of Novell at the time of the sale, and sold independently for $450 million. Absent these included proceeds, the price paid at closing would be less than Elliott's original bid. Whether or not Elliott had assumed it could sell the patents for as much is impossible to tell, but apparently Attachmate valued the remainder of Novell's business and assets at substantially less than Novell's cash and short term securities, which currently stand at $1.09 billion. The math is as follows:

$2.2 billion (the total proceeds to be received by Novell shareholders), minus $450 million (the amount contributed by CPTN, the Microsoft consortium), less $1.09 billion (cash and short term securities) leaves a paltry $660 million for all of once-proud Novell. And if, as I've read elsewhere, Elliott Associates is going to retain its stake in the surviving company (which I'll call "New Novell"), that means that Attachmate needs to put up even less, since it won't have to actually buy out Elliott's substantial stake.

Microsoft's role and what it gets from the Novell deal

The deal's closing conditions also reveal, as I have suspected, that Microsoft must have played a major role in making this deal happen. Updegrove states that the closing conditions reveal that "Attachmate is basically using $450 million of someone else's money (Microsoft and unnamed parties [in the CPTN patents purchase]) to buy Novell." Updegrove continued:

Whether Attachmate brought Microsoft in or vis-versa is unknown, but given Microsoft's preexisting agreements with Novell, and especially the fact that the important patent cross licensing agreement it entered into with Novell four years ago is up for renewal in one year, it seems safe to assume that Microsoft would have been in discussions with Novell since the Company was first put into play.

The mysterious and intriguing part, on which more below, is why Microsoft is not acting alone. There are a number of possibilities, including possible concerns on Microsoft's part that antitrust regulators might not have approved a purchase by it alone and that (as would appear to be the case) the patent acquisition is part of a larger, but still undisclosed, business plan.

Updegrove also points out, "Given that Novell's current liquid assets equal the debt financing promised by Attachmate, the acquirer would not have had to visit many banks to get a commitment. In effect, Attachmate will be acquiring Novell for only $425 million (some of which will be coming from "certain equity investors")."

The more I learn about this deal, the more I think Microsoft really is pulling all the strings.

Even if the Attachmate purchase doesn't come through, Microsoft may still end up with the patents. Indeed, if the deal doesn't go through, Microsoft may end-up with more of Novell's IP.

The relevant paragraph from the Novell's merger 8-K reads

In the event that CPTN has elected to continue the Patent Purchase Agreement following a termination of the Merger Agreement as described above, Novell and CPTN will enter into a royalty-free, fully paid-up patent cross license for no additional consideration, effective as of the closing, with respect to all patents and patent applications owned or controlled by them on mutually acceptable terms that are no less favorable in the aggregate to either party than the terms of any other patent cross license offered by CPTN to any other person (other than any member of CPTN or an affiliate of any such member).

In other words, as Updegrove states, "not only the 882 patents covered by the patent sale are covered. Instead, the parties will negotiate a cross-license to all of the patents, and patent applications, owned by each party. The price for Novell being able to continue its business if the Attachmate deal doesn't go through, but the CPTN deal does, would therefore be that it would have to license allof its patents to CPTN - for no additional consideration."

What a deal!

So what will Microsoft do with all this? Updegrove said, and I agree, that we're not likely to see a return of open warfare against Linux ala SCO's futile war against Linux. Instead, he and I both expect Microsoft to continue to claim that Linux violates its patents, without ever revealing details publicly, Instead, Microsoft reveals their claims under non-disclosure agreements and companies like Amazon pay a Microsoft 'tax' for using Linux.. Therefore, Updegrove expects that "this new development does not meaningfully change the landscape. At most it means that Microsoft could claim greater royalties in a given situation."

We're still a long way from knowing all the details and exactly what role Microsoft has played in this merger. I'm more sure than ever though of one thing: the company that will benefit the most from the Novell merger is Microsoft.

Copyright © 2010 IDG Communications, Inc.

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