Novell Rally Stalls

A downgrade points out the limitations of a Microsoft alliance.
Author:
Publish date:

The rally enjoyed by shares of

Novell

(NOVL)

following

news of the alliance between the Linux distributor and

Microsoft

(MSFT) - Get Report

is running out of steam.

Less than three weeks after shares jumped by almost 16%, the stock has given up more than half of its gains. At the close of trading on Nov. 2, Novell was selling for $6.89; in recent trading the stock was off 4 cents to $6.26.

The slide was emphasized Monday by a note downgrading the stock to underperform by Credit Suisse analyst Jason Maynard. "Although the new relationship with Microsoft will include a net payment to Novell of approximately $308 million, we view this as more of a one-time event, and we do not believe the 10% appreciation in the stock is sustainable," Maynard wrote.

The deal between the two longtime rivals aims to remove at least some of the incompatibilities between Windows and Linux, making it simpler for businesses to use both platforms to run their networks. Microsoft also will help market Novell's version of Linux and agreed not to sue Novell customers over potential intellectual property infringements.

Some businesses fear that Microsoft will act on its claim that Novell's Suse Linux contains code owned by Microsoft. By agreeing not to sue, Microsoft has removed a barrier to adoption of Suse Linux.

Maynard also said the deal will hurt Novell's standing in the open-source community

many Linux developers view Microsoft as an enemy and added that

Oracle's

(ORCL) - Get Report

entry into the market means there won't be enough demand to support market share gains by Novell.

Credit Suisse has an investment banking relationship with Novell.

Novell has struggled to gain a foothold as a Linux distributor as its core Netware network operating system business has gradually eroded. The alliance with Microsoft gives the company much-needed marketing muscle as it strives to gain ground on

Red Hat

(RHAT)

, now the leading distributor of Linux.