Apple looks into merger with Novell

December 09, 1992|By Lee Gomes | Lee Gomes,Knight-Ridder Newspapers

Apple Computer Inc. and Novell Inc. have engaged in top-level discussions in recent weeks about the possibility of rewriting the rules of the computing world by merging their companies into an $8 billion hardware-software giant.

The talks between Apple's president, John Sculley, and Novell's president, Ray Noorda, have been a closely held secret, known at the two companies only by an elite group of senior executives. But information about the discussions was provided by a person in the financial community with contacts at both companies.

There is no guarantee that the negotiations will succeed -- exploratory merger talks, not uncommon among high-technology firms, often fail to produce an agreement. But if nothing else, the discussions show the seriousness with which both companies take the threat of Microsoft Corp. and its continued dominance of the computer software world.

The logic behind an Apple-Novell merger stems from two marketplace realities. As a provider of desk-top computers, Apple has not had the success it wanted in penetrating computing's largest market: the corporate computing world, which buys tens of millions of machines a year and which has a propensity toward systems designed by IBM.

Second, that corporate world is increasingly interested in connecting systems into computer networks. The marketplace for networks, which involve huge and complex software programs, is dominated by Novell.

An Apple-Novell team-up would allow the combined companies to become a potent force by selling Apple's highly praised, easy-to-use computers with the advanced networking and other communications software features associated with Novell.

"It solves a lot of problems for both companies," said the person familiar with the discussions, who on Monday was attending an industry conference in Burlingame, Calif. "Sculley talked throughout his speech today about the importance of networking. It was almost like he was preparing people for a merger."

The crucial role of networking has not been lost on Microsoft, the biggest presence in the computing software world by virtue of its DOS and Windows operating system products -- key elements in 80 percent of personal computers.

Microsoft plans to include networking abilities in Windows NT, its next-generation operating system program, due out next year. Early indications are that NT will be an enormous success -- so much so that companies like Apple and Novell fear that a Microsoft juggernaut would limit their growth in corporate computing.

In addition to the improved strategic position a merger could give Apple and Novell, a union could also solve the problem of finding a successor to the 67-year-old Mr. Noorda, the person most responsible for the company's success. He plans to retire soon.

Mr. Sculley and Mr. Noorda have not only had philosophical discussions about the direction the joined companies could take, but have also exchanged financial and product information.

Major issues would need to be resolved, not the least of which are financial.

Apple's market valuation -- calculated by multiplying its stock price by the number of outstanding shares -- is about $6.8 billion, based on yesterday's closing prices.

But although Novell's sales in its most recent four quarters were only about one-eighth of Apple's $7 billion, Novell's valuation, at $9.3 billion, is 37 percent higher.

That's because profits are far greater on Novell's software than on Apple's hardware.

Even with its lower sales, Novell made $230 million in its most recent four quarters, compared with Apple's $530.4 million.

Although Novell is based in Provo, Utah, most of its top managers and about a third of its 3,100 employees are based in Silicon Valley, where the company has a new facility on the drawing boards. Apple is based in Cupertino, Calif., and has about 14,000 employees worldwide. Officials at the companies could not be reached for comment.

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