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Novell buys SilverStream, and a strategy

Novell buys SilverStream, and a strategy

Novell has stepped into the Web services business, as promised, by acquiring SilverStream Software for $212 million in cash. SilverStream sells an extended J2EE-based development, integration and deployment platform.

The acquisition is part of Novell's three-pronged strategy to target "solutions, security and Web services" as areas of growth. Having bought Cambridge Technology Partners for the first area and overhauled its own products for the second, the company now appears to have all the pieces in place. Novell can also build upon SilverStream for what it's calling its "advanced integration platform." The company apparently revealed plans for this platform earlier than it intended to, and has not followed up with much detail.

Deal rationale: Aside from its high-level goal to be a player in the Web services space -- something this deal enables Novell to achieve -- there are three main reasons behind the purchase.

First, SilverStream gives Novell a reason to sell to developers for the first time (it made a few failed attempts with things like AppWare years ago). Second, it enhances its Java, and in particular its J2EE, story quite significantly beyond having a fast Java virtual machine in its NetWare operating system. And third, it will give its channel partners something of a break by enabling them to sell a Java application server from Novell if they choose to. SilverStream has its own J2EE application server, but mostly promotes those of its partners BEA and IBM. Previously, Novell didn't leave its channel partners much to sink their teeth into and build upon.

The deal makes sense for SilverStream, which needed to get bought by a company with scale and reach. Besides, there were few other options on the table. CEO David Litwack, who will report to Stone as a senior vice president, said one of the attractions is Novell's understanding of networks, directories and security, which will all be important elements of Web services.

Strategy: While Web services development tools are already becoming a commodity, players that have both the tools and the platforms on which to execute them are at an advantage. But that's not going to be enough, and Novell knows it -- and anyway that sort of sentiment gives it a good reason to say it's not trying to compete with SilverStream partners BEA and IBM in the J2EE application server space.

What it needs next are Web services management, metering and monitoring tools, which Novell itself has acknowledged as gaps in its product line. It will attempt to develop as much as it can in-house, but chairman and CEO Jack Messman said the company will also buy what it needs. There are a lot of startups in the Web services management space that could be attractive, including AmberPoint, Blue Titan, Infravio and Talking Blocks, among others.

Management, metering and monitoring are part of Novell's so-called advanced integration platform (something that vice chairman Chris Stone appeared to want to talk about on the conference call, but that Messman did not). Stone, who rejoined Novell in March, said SilverStream is doing what he had wanted to do at Novell in the late 1990s -- he left the company because nobody at that time would listen. Stone returned to Novell because he knew that Web services would be front and center to the strategy.

Products: SilverStream's eXtend platform comprises four modules: the Composer visual XML-based integration tool, the Workbench J2EE development tools, the Director portal and the eXtend Application Server.

The first two are of the most interest to Novell, since it has a portal of its own and, as previously mentioned, SilverStream's own J2EE application servers will probably become mainly a channel product. It also supports BEA WebLogic and IBM WebSphere, and is expected to sign with Sun Microsystems soon. The platform will be renamed Novell extend, and Messman described the integration needed as "minor."

Porting it to NetWare is not so minor, but it is also not a high priority. Novell has recognized that its days as an operating system player are long gone, and it is now focused further up the software stack, beyond even the application server.

Competition: Novell approached SilverStream for this deal, not the other way around. It had looked at the products of numerous private and public companies -- one is believed to be privately held and somewhat troubled Bowstreet -- before settling on SilverStream.

Novell's strategy of consulting plus Java and Web services servers is close to that of IBM. Obviously, the two are worlds apart in size and scope, but Stone acknowledged that it is attempting to replicate some of IBM's success over the past 10 years. When BEA releases WebLogic Workshop later this year, it will become more of a threat.

In the Web services space, SilverStream has been going up against specialist firms such as Bowstreet, Cape Clear and Iona, as well as newer startups such as Actional and Infravio. Novell is hoping that its direct sales force will no longer encounter its own channel, which it admits it made a mess of in the past four years or so.

Financial: Under the terms of the deal, Novell will pay $9 in cash for each SilverStream share. However, Novell is at pains to point out that although that values SilverStream at $212 million, which is a 75% premium over the previous day's closing price, SilverStream has about $100 million in cash and equivalents in the bank, so it is only a cash outlay of about $112 million for Novell. SilverStream has been cash-flow positive since the third quarter of 2001, but is not profitable.

Assessment: It's an interesting move for Novell, and a sensible one for SilverStream (which was running out of options). A lot will depend on Novell management executing its plans and choosing its next moves carefully, as it knows that SilverStream's products and consultants alone will not be enough. It needs to provide a better integration story and plug some gaps in terms of Web services management -- and needs to do these things this year.

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