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Novell's (NOVL) management shake-up should be a green light to investors who have been waiting for some signs of life from the beleaguered software maker.

The announcement that Novell CEO Jack Messman and CFO Joseph Tibbets were given the heave-ho was met with cheers by Wall Street Thursday, as the stock was bid up 9.2% on more than three times its average daily volume. More gains are likely if new CEO (current President and COO) Ronald Hovsepian can sell the Novell story to customers and investors better than his predecessor.

The replacement of the company's CEO and CFO indicates a fresh attitude by the board of directors. The new management team is expected to improve cost control and financial performance. The company's products are award winning and very well received, but Novell has been hamstrung by lousy execution. While

Red Hat




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are imposing competitors, they have created opportunities for Novell to get a foothold in the Linux space.

What is the Novell Story?

Back in the 1990s, Novell was a leading networking-software maker. However, the company got its clock cleaned by Microsoft. Now, Novell is banking on Linux to trigger its resurrection. In 2004, Novell acquired SUSE Linux, the largest Linux vendor in Europe. While the company has roughly 20% of the Linux market, it could be ready to take more share.

Earlier in the year, Novell landed

Bear Stearns

as a client over Red Hat.


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is a significant partner and has a financial stake in Novell as well. Big Blue also helps Novell maintain its position in mainframes while it goes after the server and PC business dominated by Red Hat.

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The business world likes the idea of Novell so that Red Hat doesn't get too powerful. The last thing anyone wants is to be held hostage by another monopolistic software company. Notably, the perception of Red Hat as the 800-pound gorilla is already starting to emerge. "Red Hat has a reputation with some customers as being arrogant," says David Eller, analyst with independent research firm Rochdale Securities. "They are holding firm on prices, which is good for investors, but it opens the door for Novell."

Eller believes that expectations are so low for Novell that should the company take away a few high-profile customers, the Street would greet the news enthusiastically, likely lifting the stock further.

Novell bears could also be caught napping if a desperate PC maker includes Novell's software on its boxes in order to market inexpensive PCs before the holiday season. "Microsoft has dropped the ball" with the delay of its new operating system Vista, Eller suggests. "If an OEM like


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, that is scrambling for revenue, wanted to offer a low-cost PC in August, say, to college students, it could offer Novell's operating system."

Rochdale does no investment banking and Eller does not have positions in securities mentioned.

Not all are convinced, however. "It will be more difficult for Novell to catch up to Red Hat than it was two years ago," says Nancy Hull with Boca Raton, Fl., money manager Reefbreak Management. Hull applauds the ouster of the two executives, but wants to see Novell "re-energize its customer base" before turning more positive on the stock. "It's tough to spin the same story again," she declared. Hull and Reefbreak do not have positions in Novell or Red Hat.

The Times They Are a Changin'

But perhaps the most important change is change itself. At this point, which is admittedly early, the perception is that the change in Novell's executive suite is a crucial step in the right direction. "It's not because of who was brought in necessarily, but because of the perceived shift in the board's attitude toward improving financial performance," Eller says.

While few on the Street expect the new CEO to whip the company into shape overnight, there is the belief that he will reign in costs, which should boost operating margins. Those figures, 3% for the past 12 months, pale in comparison to Red Hat's 21%.

Eller is confident that Novell will eventually reclaim some of its past glory. "They are going to be more flexible than Red Hat," he says. "Novell is going to be scrappier like Avis -- 'We try harder'."

Novell shares are down 85% from their 10-year high achieved in 2000. With three buys, eight holds, two sell ratings and earnings expectations of just 14 cents per share for fiscal 2006 (ending in October), the stock is about as popular as David Stern in Dallas. But businesses want Novell to succeed to ensure they have more than one choice in the marketplace. If there's a perception that the new CEO can sell Novell's story, that should be enough to keep the stock going in the right direction.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86,87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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