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The Elliott Associates $$ Agreements Behind the Novell-Attachmate Merger - Updated 4Xs
Friday, November 26 2010 @ 09:36 PM EST

Elliott Associates has filed with the SEC its own required filing, a 13D/A with all the financing documents behind the Novell acquisition by Attachmate. It says it amends a February 12, 2010 13D, which shows Elliott through its various tentacles beginning to buy Novell stock on the open market in January. First, who are all the Elliott entities?

The February 13D tells us:
ITEM 2. Identity and Background. (a)-(c)This statement is being filed by Elliott Associates, L.P., a Delaware limited partnership, and its wholly-owned subsidiaries (collectively, "Elliott"), Elliott International, L.P., a Cayman Islands limited partnership ("Elliott International"), and Elliott International Capital Advisors Inc., a Delaware corporation ("EICA" and collectively with Elliott and Elliott International, the "Reporting Persons"). Paul E. Singer ("Singer"), Elliott Capital Advisors, L.P., a Delaware limited partnership ("Capital Advisors"), which is controlled by Singer, and Elliott Special GP, LLC, a Delaware limited liability company (“Special GP”), which is controlled by Singer, are the general partners of Elliott. Hambledon, Inc., a Cayman Islands corporation ("Hambledon"), which is also controlled by Singer, is the sole general partner of Elliott International. EICA is the investment manager for Elliott International. EICA expressly disclaims equitable ownership of and pecuniary interest in any shares of Common Stock.
With that background, we can follow the next step. Elliott Associates, L.P. (through The Liverpool Limited Partnership) bought a lot of stock beginning in January. And Elliott International, the Cayman Islands entity, bought the rest, to a combined total of approximately 7.1% of Novell stock:
(a)Elliott beneficially owns 11,894,134 shares of Common Stock, which constitute 3.4% of all of the outstanding shares of Common Stock. The 11,894,134 shares of Common stock owned by Elliott are owned through The Liverpool Limited Partnership, a Bermuda limited partnership, which is a wholly-owned subsidiary of Elliott.

Elliott International and EICA beneficially own an aggregate of 12,805,866 shares of Common Stock, which constitute 3.7% of all of the outstanding shares of Common Stock.

Collectively, Elliott, Elliott International and EICA beneficially own 24,700,000 shares of Common Stock constituting 7.1% of all of the outstanding shares of Common Stock.

(b)Elliott has the power to vote or direct the vote of, and to dispose or direct the disposition of, the shares of Common Stock beneficially owned by it.

Elliott International has the shared power with EICA to vote or direct the vote of, and to dispose or direct the disposition of, the shares of Common Stock owned by Elliott International. Information regarding each of Elliott International and EICA is set forth in Item 2 of this Schedule 13D and is expressly incorporated by reference herein.

This is all preparatory to this current merger deal, in that Elliott Associates and Elliott International, the Cayman Islands entity, are putting up the dough, along with others, to make the merger between Novell and Attachmate happen, and Elliott gets an investment in Attachmate's parent, Wizard. Yes, Attachmate isn't the name of the parent. It has a parent, Wizard. You can see that in the Investment Agreement, Exhibit E attached to the 13D/A, which begins:
INVESTMENT AGREEMENT, dated as of November 21, 2010 (this “Agreement”), by and among Wizard Parent LLC, a Delaware limited liability company (“Wizard”), Elliott Associates, L.P., a Delaware limited partnership (“Elliott Associates”), and Elliott International, L.P., a Cayman Islands limited partnership (“Elliott International” and, together with Elliott Associates, the “Elliott Parties”). Capitalized terms used but not otherwise defined in this Agreement shall have the meanings ascribed to such terms under the Agreement and Plan of Merger, dated as of November 21, 2010 (the “Merger Agreement”), by and among Attachmate Corporation, a Washington corporation and a Subsidiary of Wizard (“Parent”), Longview Software Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), and Novell, Inc., a Delaware corporation (the “Company”).
If I'm reading it right, Elliott is contributing its Novell shares, valued at $72,500,000 and an additional $22,500,000 to Wizard for equity securities of Wizard. Elliott also invests to the tune of $15,000,000, as I'll show you in a second. The money and shares go to Wizard, not Attachmate.

Wizard is described as "a holding company and, other than the capital stock of its Subsidiaries, has no assets or operations and has no Liabilities other than those incidental to its ownership of its Subsidiaries or pursuant to the Original LLC Agreement" and "is classified as a partnership and not as an association taxable as a corporation for United States income tax purposes". So, what does Novell get out of that? Just that the deal happens, I guess. Here's the wording on that:

WHEREAS, in connection with the Merger, the Elliott Parties have delivered an Equity Commitment Letter (the “Elliott ECL”) to Wizard, pursuant to which the Elliott Parties are obligated, at or prior to the Contribution Closing (as hereinafter defined), to contribute shares of Company Common Stock to Wizard (the “Merger Contribution Company Stock”) having an aggregate value, based on the Merger Consideration (as the Merger Consideration may be increased by any amendment to the Merger Agreement or otherwise following the date of this Agreement), of $72,500,000 plus the amount, if any, by which the Contribution Obligation thereunder may be increased in respect of the Market Flex Requirement (as defined in the Elliott ECL) (the “Merger Contribution”);

WHEREAS, in addition to the Merger Contribution, pursuant to the Elliott ECL, the Elliott parties are obligated, at or prior to the Contribution Closing, to contribute shares of Company Common Stock (the “Additional Contribution Company Stock” and, together with the Merger Contribution Company Stock, the “Contributed Company Stock”) to Wizard having an aggregate value, based on the Merger Consideration (as the Merger Consideration may be increased by any amendment to the Merger Agreement or otherwise following the date of this Agreement), of $22,500,000 the (“Additional Contribution” and, together with the Merger Contribution, the “Contribution”),

WHEREAS, in consideration of the Elliott Parties’ willingness to deliver the Elliott ECL and effect the Contribution, Wizard desires to issue to the Elliott Parties the equity securities of Wizard described in Exhibit A hereto (the “Issued Equity Units”) in a transaction described in Section 721 of the Code, and to enter into an Amended Limited Liability Agreement of Wizard and/or other Qualifying Alternative Arrangements containing substantially the terms set forth on Exhibit A hereto (the “Amended LLC Agreement”) with the Elliott Parties and certain other equity holders of Wizard;

[The Exhibit E actually says $72,5000,000, but it's obviously a typo.] Wizard then has to pay Elliott its expenses, if the deal happens as contemplated:
11.Reimbursements. If the transactions contemplated by this Agreement are consummated, Wizard shall pay or cause to be paid, promptly upon delivery of any written request accompanied by appropriate supporting documentation, to Manchester Securities Corp., a New York corporation and a wholly owned Subsidiary of Elliott Associates (“Manchester”), or such other Person that Elliott Associates may designate in writing from time to time, an amount in cash equal to any out-of-pocket expenses incurred by the Elliott Parties and their respective Affiliates in connection with the acquisition of the Company and related arrangements among the Elliott Parties and Wizard and its Affiliates, up to an aggregate amount not to exceed $3,250,000.
So this is all way more complicated than we thought. I haven't got it all figured out yet, actually. I'm hoping Andy Updegrove puts down his fork and dives in to explain it all to us. But what's clear already is that Elliott has more than it had before, shares and investment shares, meaning more influence from those shares and the investment money. It has equity shares now, in Wizard, the parent of Attachmate, which will have a wholly owned subsidiary, Novell. So when Novell looks up, at the top it sees Wizard and Elliott looking back down at it.

The filing says this about a side letter about the money investment, in case it isn't complex enough already:

On November 21, 2010, Elliott and Elliott International also entered into a letter agreement (the “Side Letter”) with Francisco Partners, L.P., a Delaware limited partnership (“Francisco”), pursuant to which Elliott and Elliott International agreed, subject to the terms and conditions set forth in the Side Letter, to contribute to a newly formed Delaware limited liability company to be managed by Francisco (the “New LLC”) shares of Common Stock having an aggregate value, based on the Merger Consideration (as the Merger Consideration may be increased by any amendment to the Merger Agreement or otherwise following the date of the Side Letter) of $15,000,000 (the “LLC Contribution”). Immediately following the LLC Contribution, the New LLC will contribute the LLC Contributed Shares (as defined in the Side Letter) to Wizard Parent in exchange for equity securities of Wizard Parent.
Is that the end of "New LLC", mentioned in Exhibit G, or just the beginning of its life? I can't tell, but here's what the exhibit says:
The Elliott Parties and the Francisco Parties hereby agree that, concurrently with the Contribution Closing, the Elliott Parties shall, in addition to the amounts included in the Contribution, have the obligation to contribute, and shall have the right to contribute, to a newly formed Delaware limited liability company (the “New LLC”), shares of Company Common Stock (the “LLC Contributed Shares”) having an aggregate value, based on the Merger Consideration (as the Merger Consideration may be increased by any amendment to the Merger Agreement or otherwise following the date of this Agreement) of $15,000,000 (such contribution, the “LLC Contribution”). Immediately following the LLC Contribution, the New LLC shall, and Francisco shall cause the New LLC to, contribute the LLC Contributed Shares to Wizard in exchange for New Money Units having an aggregate liquidation preference of $15,000,000.

Effective as of the LLC Contribution, (i) Francisco shall be the Managing Member of the New LLC and shall have all rights to govern the New LLC (provided that the operating agreement of the New LLC shall provide such customary protections as are necessary to replicate, from an economic perspective, the direct ownership of New Money Units by the Elliott Parties, including (A) the New LLC shall not conduct any business or enter into any transaction other than matters incidental to its ownership of the New Money Units issued in respect of the LLC Contributed Shares and (B) such New Money Units shall be treated in a similar and proportionate manner as all other New Money Units held by the Francisco Parties (including with respect to voting and disposition thereof)), and (ii) the Elliott Parties shall be the Economic Members of the New LLC and shall have all rights to the economic interests of the New LLC (including distributions made to the New LLC in respect of New Money Units). Prior to the LLC Contribution, Francisco and the Elliott Parties shall negotiate and prepare the limited liability agreement (or an amendment thereto) of the New LLC in good faith to reflect the terms of this Agreement."

So the other money people show up here. But why? Why not just invest in Wizard? Or just buy Novell outright? I haven't figured that out yet, unless it's just that Elliott wasn't willing to give Novell the full price and others stepped in to help make it happen.

The voting agreement, Exhibit H, is between Attachmate, not Wizard, and Longview and Novell. Wizard does no business. It's a holding company.

I don't see the advantage to anybody. But you know me. Wall Street and I reside in separate quarters. No fraternization whatsoever. Some of you will be able to figure it out, though, so I'm showing it to you, even though I haven't yet got the business plan clear myself. Elliott's Dickensian reputation precedes it, of course, so we know what they usually do.

I note Item 6 of in this August Elliott filing talks about derivative agreements:

ITEM 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.

Elliott (through Liverpool) and Elliott International have entered into notional principal amount derivative agreements (the “Derivative Agreements”) with respect to 2,087,558 and 3,131,338 shares of Common Stock of the Issuer, respectively (representing an economic interest in 0.6% and 0.9% of the shares of Common Stock of the Issuer, respectively). The Derivative Agreements provide Elliott and Elliott International with economic results that are comparable to the economic results of ownership but do not provide them with the power to vote or direct the voting or dispose of or direct the disposition of the shares that are the subject of the Derivative Agreements. The counterparties to the Derivative Agreements are unaffiliated third party financial institutions.

Except as described above in Item 4 and in this Item 6, none of the Reporting Persons has any contracts, arrangements, understandings or relationships with respect to the securities of the Issuer.

So Elliott can't vote these shares, but they get paid. Who are the counterparties? Just the earlier named equity entities like Francisco Partners, or could it be others too?

And should we worry that 60% or so of the investment is from a Cayman Islands entity?

: )

If I figure this out any better than this, I'll swing back by, but in the meantime, you can take a look too.

Update: Matt Asay answers one question we've had, whether the 882 patents are all or just some of Novell's patent portfolio. And the answer is, only part. Novell has 2,000 or so. But the rest of Asay's article is depressing indeed:

Attachmate has told SUSE's development community not to worry, that life will be much the same as before. This isn't very reassuring. Attachmate has zero credibility in the open-source world. Name a single open-source project that Attachmate contributes to in a meaningful way. A search for "Attachmate open source" yields nothing. Well, it does reveal this little piece of anti-open source FUD in Attachmate's FAQ for its FIPS 140-1 product:
FIPS 140 validation provides third-party confirmation that a security software implementation meets the highest possible standards. This validation sets Reflection for Secure IT apart from competitive software, such as open source software, which is not validated.
Welcome home, OpenSUSE developers!

This is the final end of Novell, a company that consistently squandered its opportunities to regain relevance, slouches its way into Attachmate, while potentially poisoning the Linux industry through the sale of its patents to Microsoft/CPTN Holdings. While this IP doesn't include the Unix copyrights, it does include 882 of Novell's roughly 2,000 patents which almost certainly involve IP surrounding WordPerfect and other technologies that give Microsoft more cause for sabre-rattling against open-source projects like OpenOffice.

So, he thinks it's about WordPerfect. That's reassuring on the one hand, and nauseating on the other. But while I suppose it's possibly for offensive patent use, I think it's more likely for defensive purposes, to make sure no one else got those patents.

The most interesting part of the article to me was what he says about Chris Stone, and he confirms my impression from the trial testimony that he is an impressive guy and they should have kept him:

It didn't help that Novell lost key executives like former vice-chairman Chris Stone (to pursue "other" opportunities) and Ledbetter (joined Pelion Venture Partners), replacing them with professional managers like Ron Hovsepian. I admire Hovsepian for his operational expertise, but he was never the sort of dynamic visionary that Stone was - the sort of leader Novell needed in order for the company to become relevant. I really like Hovsepian as a person and think he's an efficient manager. But he was unlikely to be the one to brainstorm Novell's way out of its slump.
The slump was the legacy stuff, by the way, not SUSE Linux. But if Attachmate isn't into FOSS and has no experience, I'm thinking they may think they can spiff it up and sell it on to someone else in a fairly short time frame. If so, that might work out eventually.

And yet another shareholder lawsuit, according to BusinessWeek:

The proposed sale doesn’t treat all shareholders equally, investor Lawrence Fisk said in his complaint, filed in Delaware Chancery Court in Wilmington on Nov. 23, the day after the Attachmate offer was announced. Hedge-fund manager Elliott Associates LP, which failed to take Novell private in March, would get 7 percent of the merged company for its 7 percent stake in Novell.

Those, and other terms, “are fundamentally unfair to plaintiff and the other shareholders of the company,” Fisk said.

Update 2: And here's the previously filed Exhibit B, the letter to Novell from Elliott filed in March. And here's Novell's CEO's memo to employees.

Update 3: I stumbled across this 2005 article about Attachmate while looking for something else, so I thought I'd share it with you:

With financial backing from a consortium of blue-chip private equity investors, the combined entity, called AttachmateWRQ, will move forward with one of its first initiatives being to grow even more. The company will begin looking in earnest to find additional acquisition targets in the fragmented terminal-emulation software market.

Terminal-emulation software helps connect mainframe computers and Web-based servers with PC networks.

Next to IBM Corp., AttachmateWRQ is one of the biggest players in the market, which AttachmateWRQ's backers -- Thoma Cressey Equity Partners, Golden Gate Partners and Francisco Partners -- think is ripe for consolidation.

And here's how Attachmate describes itself in a recent press release about a deal with the IT division of the Emirates Group:
Attachmate delivers advanced software for terminal emulation, legacy modernization, managed file transfer and enterprise fraud management. With our technologies, more than 65,000 businesses worldwide are putting their IT assets to work in new and meaningful ways.
And the Salt Lake Tribune has the Utah perspective:
Attachmate Corp. CEO Jeff Hawn said Monday he likely will be visiting the Provo office of Novell next week as part of planned acquisition of the company that got its start in Utah. But Hawn said plans for the Utah office haven’t been formulated, and he could not yet say what the $2.2 billion deal will mean for the Provo office. That facility is Novell’s biggest with about 1,380 employees....

"Management had struggled over the last few years to grow the new businesses and that created an opportunity, given all of the cash from the balance sheet for financial bidders," said Rich Williams, an analyst at Cross Research in Livingston, N.J., who rates Novell shares "hold" and doesn’t own any. "The financially oriented buyers are going to hold the company, reshape it to a degree and then in a few years, in a more attractive environment, bring the company public."

Here's the Francisco Partners page on Attachmate, and I can't help but notice that they also invest in Barracuda Networks, which is an OIN licensee since 2007. Here are all the lawyers who worked on the deal. All the players but Elliott had antitrust attorneys on their team.

And if you are curious as to what the Forrester folks think it all means, here's where they blog. I gather they mostly think SUSE will continue but eventually be sold on to some other party, like IBM or HP or even Oracle or SAP.

Update 4: Andy Updegrove has an interesting followup regarding the deal, specifically on whether we will ever find out who are the members of the patent consortium Microsoft put together, and the short answer is probably never:

The first and most obvious question relates to who the other members of CPTN Holdings, LLC (CPTN) the Microsoft syndicate may be. To my knowledge, there has not yet been a leak of this information. As I noted in my previous blog entry, the transaction documents that are made public pursuant to public reporting obligations may never reveal the names, unless one of the consortium members is required to disclose it in one of its own public reporting documents. Presumably that will happen, if it will happen at all, within three to four months, as part of a normal quarterly filing on Form 10-Q.

The second, and far less likely way would be as an indirect result of a filing by CPTN or Attachmate under the Hart-Scott-Rodino Public Improvements Act of 1976 (HSR). Whether or not a filing is required involves a complex analysis of the facts, as summarized in a 20 page Introductory Guide available at the Web site of the Federal Trade Commission (FTC), the agency which receives HSR filings and determines whether or not to permit a transaction described in an HSR filing to proceed.

If the patent acquisition were to be made by Microsoft alone, an HSR filing would clearly be necessary. Whether an acquisition by a consortium with the specific membership of CPTN would be required is a more complex question....

In my last blog entry, I had said that I assumed, but had not had time to look up, whether HSR filings are public; I’ve now had time to take a look, and neither the fact that an HSR filing has been made, nor the text of the filing itself, becomes public. In fact, filings are even exempt from disclosure under the Freedom of Information Act.

Still, as implied, the fact that it hasn't leaked yet doesn't mean it won't ever. People are people, and these things in my experience do leak eventually, even if you don't read about it in the funny papers.

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