Novell Jumps 21% on News of SUSE Linux Deal

Updated from 4:05 p.m. EDT

NovellNOVL shares shot up Tuesday after the networking-software company said it would buy SUSE Linux and receive a $50 million investment from IBMIBM.

Contrary to typical pressure faced by an acquiring company, shares of Novell soared 21.2%, or $1.28, to close at $7.33, in trading volume that was more than 13 times the stock's average. Shares of Linux competitor Red HatRHAT ended at $13.58, down $1.80, or 11.7%. IBM ended at $89.14, down 54 cents, or 0.6%. Shares of SCO GroupSCOX, which has sued IBM for allegedly misappropriating its Unix code in its Linux business, closed at $17.98, up $1.99, or 12.5%.

In a bold move that was not altogether surprising to Novell observers, the company said it would buy Germany-based privately held SUSE Linux for $210 million in cash, which is about five times trailing sales. The acquisition, expected to close by the end of January, builds on the open-source portfolio that Provo, Utah-based Novell started with the acquisition of Linux server and desktop provider Ximian in August.

The deal is expected to be accretive to earnings in fiscal-year 2005 and should have no impact in fiscal year 2004, management said on a conference call.

Novell also said IBM intends to make a $50 million investment in Novell convertible preferred stock. IBM and SUSE Linux also are negotiating extensions to the agreements between IBM and SUSE Linux for support of SUSE Linux on IBM products to provide product and marketing support arrangements for SUSE Linux.

Both moves give further legitimacy to the open-source Linux movement, analysts and observers said.

"This is probably good news for Novell and good news from the Linux perspective," said Meta Group analyst Earl Perkins. "Now, you have a recognizable name that is bringing essentially SUSE Linux and Red Hat more into the mainstream."