Software Giants Lotus, Novell Call Off Merger : Technology: The two couldn’t agree on the composition of the combined firm’s board of directors.


The biggest merger in software industry history fell apart over the weekend when executives of Lotus Development and Novell Inc. could not agree on the number of directors each side should have in the combined company.

Billed as a merger of equals, the nearly $1.5-billion stock swap would have created one of the nation’s largest computer software companies, making it a formidable competitor to industry leader Microsoft of Redmond, Wash. But when Novell’s board late Friday demanded equal representation on the board of the merged company, Lotus Chairman Jim Manzi refused.

Lotus, based in Cambridge, Mass., announced Saturday that it had terminated negotiations with Provo, Utah-based Novell because “implementation issues associated with the merger were too great.” Manzi, in a prepared statement, expressed disappointment but added that the company’s business will not be affected by the disintegration of the deal, which was announced in early April. “Our direction remains unchanged,” he said.

Novell Chairman Ray Noorda declined to comment Sunday.


Analysts had applauded the proposed combination of the two very profitable, fast-growing companies. The merger would have diversified Lotus, which is essentially a company with a single product--its best-selling Lotus 1-2-3 spreadsheet program. Novell, creator of NetWare, the top-selling program for linking a business’s personal computers, would have obtained better access to the big corporations that Lotus courts.

Lotus posted income of $68 million on sales of $556 million last year. Novell earned $48.2 million on sales of $421.9 million in the fiscal year ended Oct. 28.

“From an industry standpoint, it looked like a good marriage--but maybe not,” said Nancy McSharry, PC software analyst at International Data Corp., a market research firm in Framingham, Mass. “And it’s better to have it fall apart before it gets to the altar.”

Hints of problems emerged last week when the companies extended by three days a letter of intent that was due to expire last Tuesday. The extension came amid reports that, among other aspects of the transaction, Novell shareholders were unhappy about the role of Novell and Noorda in the proposed company.

Last week, Lotus made concessions to put the two firms on a more equal footing, Lotus spokeswoman Heidi Sinclair said Sunday.

Manzi and the board agreed to make Noorda chairman instead of vice chairman. Noorda still would have had to report to Manzi, the chief executive of the merged company, Sinclair said. The new company was to be called Lotus/Novell and Lotus would have had four board seats to Novell’s three.

The Lotus board approved those terms Thursday morning, Sinclair said, then Manzi left for a family vacation at Disney World. Novell’s board voted Friday to demand four seats on the Lotus/Novell board.

“We said nope, no, goodby, this is it,” Sinclair said. “It just doesn’t make sense,” because an equally divided board could easily become deadlocked in voting.

“We obviously have to question their motives--there’s no way we can deal with that,” Manzi told the Associated Press Saturday. He could not be reached for comment Sunday.

The merger’s failure may have long-term consequences for both companies, analyst McSharry said.

“Strictly speaking, there’s nothing wrong with what happened, but both companies have lost considerable face,” McSharry said.

“From a negotiating perspective, I think it’s tough to say, ‘These are the rules of the game,’ and at the last minute to change them and say, ‘It’s my ball and I’m going home.’ In the future, anyone who has dealings with Novell or Lotus is going to have second thoughts,” she said.

The transaction was proposed as a stock swap involving no cash. Lotus was to exchange 1.19131 shares of its common for each share of Novell common. After the merger, Novell stockholders would have owned 48% of the combined company.

Sinclair said Lotus did not leave the door open for renewed negotiations, adding that the 66-year-old Noorda was the one who approached Manzi with the merger idea. Noorda reportedly has never groomed a successor to take over when he retires.

The merger, which was to be wrapped up in July, was subject to approval by the boards and stockholders of both companies.