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Novell shares surge on hopes of higher bid

BANGALORE (Reuters) - Shares of Novell Inc NOVL.O jumped as much as 29 percent on Wednesday, a day after investment fund Elliott Associates bid $2 billion for the business-software maker, as investors speculated that Novell may see a higher bid.

The offer for the world’s No. 2 maker of the open source Linux operating system is at a 21 percent premium over Tuesday’s closing price.

The bid marks at least the third time that Elliott has tried to buy a technology firm in the last couple of years.

Some analysts believe that Novell will reject the offer because it is unwilling to sell its promising Linux business cheap, but it might receive other offers or even see a higher bid from Elliott.

Novell confirmed it had received a bid from Elliott, which already owns 8.5 percent of Novell, and said it would review the offer.

Elliott has pursued several technology companies over the last few years but has been unable to successfully close most of the deals.

In March 2008, WAN optimization devices maker Packeteer rejected Elliott's $5.50 bid, which valued the company at about $200 million, later accepting a higher offer from rival Blue Coat Systems Inc BCSI.O.

In October 2008, Elliott made an offer to buy Epicor Software Corp EPIC.O for $9.50 a share, but later lowered its bid to $7.50 a share. In November it terminated its bid.

Brokerage PiperJaffray said Novell would likely spurn Elliott’s proposal.

“While Novell shares have underperformed those of peers in recent years, we still believe underlying value exists due to its high-margin maintenance revenue stream,” it said in a note to clients.

Novell shares have risen about 52 percent in the last 12 months as of Tuesday’s close, while shares of larger rival Red Hat have more than doubled in the same period.

PiperJaffray has a “hold” rating on Novell’s stock.

Benchmark, which also has a “hold” rating, said it did not see this deal closing but also did not see a competing bid topping Elliott’s in the short term.

Benchmark said Novell’s operations were much more complex than those of other software companies its size, and a private equity firm with minimal operating experience wouldn’t want to take the company private and operate it itself.

Novell has a maturing core product line, currently accounting for about a quarter of its revenue, and has been losing market share to Microsoft's MSFT.O platform for many years now.

The company is trying to carve a niche in open source operating systems and security and systems management.

Last month Novell and virtualization-software maker Citrix Systems Inc CTXS.O joined hands to offer interoperability between each other's products and provide joint technical support to customers.

Top players in virtualization and cloud computing include Oracle Corp ORCL.O, Microsoft, and VMware Inc VMW.N.

S&P Equity Research, which raised its price target on Novell’s shares to $6.50 from $5, said it believed Elliott would raise its bid to complete the deal.

“We doubt that a white knight will appear,” it said.

Companies like Hewlett Packard HPQ.N, SAP SAPG.DE and IBM IBM.N could be possible bidders for Novell, while an offer from Microsoft would be unlikely, given antitrust concerns.

“We don’t see a natural buyer. But any large software or systems vendor with a track record of successfully stripping costs out of a low-growth company could be interested,” said Jefferies & Co.

Jefferies has a “hold” rating on the company’s stock.

Shares of the Waltham, Massachusetts-based company were up 27 percent at $6.04 in midday trade on Nasdaq, after trading as high as $6.15.

Editing by Mike Miller and Anil D’Silva