I don't always agree with Rick Sherlund, but Goldman's high-profile software analyst had the best headline I've seen on a sell-side note in some time. Speaking of Thursday's surprise announcement of an alliance between Microsoft ( MSFT) and Novell ( NOVL), he wrote: "Calm Down, Not That Big a Deal."

Sherlund has it right. Interesting as the deal is, it changes almost nothing from the point of view of a Microsoft investor. Indeed, it would be surprising if it had any material impact at all on the software giant's income statement. (Goldman Sachs has an investment banking relationship with Microsoft, but not with Novell.)

The deal is obviously material to Novell, and the stock got a terrific bump when the news leaked out ahead of the announcement. But will it attract new money to the stock?

Not mine, says Daniel Morgan, who helps manage $5.5 billion for Synovus Investment Advisors. "Novell still has a long road back," he says. Long is right. Once a major player in software -- its NetWare network operating system was a market leader in the 1990s -- Novell has seen a steady erosion of sales in its core business.

And the Linux market, which it entered by buying a European software developer a few years ago, still represents a very small percentage of its total revenue. And its market share is dwarfed by Red Hat ( RHAT). Even after Thursday's rally, Novell's stock is trading at less than $7 a share; six years ago it sold for $44.70

Morgan, who says that Novell hasn't impressed him in some time, adds that he needs to see more than the Microsoft deal. Apparently, he's not the only one with that view. On Friday, shares of Novell drifted lower, as some traders likely took profits and others stayed on the sidelines, figuring the stock has no where to go but down -- for now.

Digging a little deeper, Sherlund cautions investors that "this is about a subset of the market, working in virtualized environments where it is desirable to mix both Windows Server and Linux Server operating systems together on the same server platform."

It's also worth noting, as a number of analysts did Friday morning, that the success of Linux has come at the expense of Unix -- the old-school operating system that still runs a majority of the "big iron" in large enterprises -- not Windows.

What's more, a company that runs both Windows and Linux does not necessarily need to run them on the same server. In fact, many don't because it's a major technical challenge to get the two operating systems to work well together.

Of course, the agreement hammered out between the two companies is designed to address that problem, as well as reduce some if the thorny intellectual-property issues that frighten potential Novell customers.

Finally, it's not altogether clear that the agreement will hurt Red Hat, though I have to admit my first reaction was to think it would. Merrill Lynch analyst Kash Rangan says that the indemnification issue (essentially insurance against intellectual-property lawsuits) has ceased to be a hot-button issue for potential Linux customers now that the threat posed by The SCO Group ( SCOX) has receded.

SCO, you might recall, claimed to own substantial chunks of Unix code that appear in Linux and threatened to sue IBM ( IBM) and nearly everybody else in the industry, including customers, for reparations.

There's also the question of how the feisty open-source community will react once Microsoft begins to collect royalties, or tolls, as Rangan put it, related to the agreement. (Merrill Lynch is seeking investment banking business with Microsoft and Red Hat.)

The Shrinking Software Universe

Oracle's ( ORCL) $440 million takeout of Stellent ( STEL) on Thursday underlines the speed of consolidation in the software industry and the rush by big players in software -- and some in hardware -- to provide a complete "stack" of infrastructure products.

Stellent is one of the last-remaining players in enterprise content management software, along with Open Text ( OTEX). Indeed, Open Text purchased Hummingbird earlier this year, and IBM snapped up Filenet in August.

EMC ( EMC) though, got there first, picking up Documentum for a cool $1.7 billion in late 2003, and proving that a pure-play content-management company could be a good fit within a more heterogeneous organization.

Documentum's preacquisition revenue in 2003 was $289 million; as of EMC's most recent reported quarter, Documentum was on an annualized run rate of $630 million, for a compound annual growth rate of 24%.

Stellent will strengthen Oracle's hand as it seeks to expand its database capabilities to more unstructured types of data email, for example, an area that is garnering increasing attention in the business environment.

"Stellent will bring Oracle more capabilities in handling unstructured data and corporate information. On a combined basis, we believe that this acquisition will significantly strengthen Oracle's offering in the convergence of the structured and unstructured data within their customers," wrote Murray Beach, president of Boston Corporate Finance, an M&A-oriented investment bank.


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