Information Processing

Novell vs. Microsoft: What's Behind the Hate

A failed merger produced enmity, prompting Novell to try and help snare its rival in an antitrust trap

Mark Lewyn in Washington; with Richard Brandt in San Francisco
Business Week

September 27, 1993

Of the many rivalries in the personal-computer industry, for sheer nastiness it's hard to beat the one between Microsoft Corp. and Novell Inc. Microsoft Chairman William H. Gates III now blames Novell Chief Executive Raymond J. Noorda for keeping alive a three-year-old Federal Trade Commission antitrust investigation of Microsoft that has recently been transferred to the Justice Dept. He has publicly accused the 69-year-old Noorda of "increasingly paranoid political attacks" against Microsoft. Says Gates: "Ray has a tremendous vendetta against us."

For its part, Novell freely admits that it has played a key role in trying to snare Microsoft in a Federal antitrust trap (page 128). And the company has been open about its role in providing ammunition for a new European Community monopoly investigation of Microsoft. Caught in the middle are computer users who, because Microsoft and Novell refuse to cooperate, have troubles of their own. The biggest problem is that Novell and Microsoft can't agree on the code to make Windows NT communicate with Novell's popular NetWare networking software. "It's a nuisance," says Adam Ruef, a technical consultant for Mobil Corp., in Fairfax, Va. "Now, users have to be responsible for somehow assembling all the necessary pieces."

How did such hatred come about? Maybe it's the inevitable result of a flirtation that went flat. In 1989 and again in 1991, both companies now confirm, Gates and Noorda explored a bold plan for Microsoft to merge with Novell, Microsoft's chief software rival. In that period, FTC investigators were trying -- with little success -- to figure out if Microsoft's enormous market power somehow violated antitrust laws. Only after the secret merger talks came to the attention of the FTC in December, 1991, did the case gather momentum. And only after the talks finally broke off in March, 1992, and Noorda began cooperating with the feds more fully, did the FTC staff feel it had a strong case to present to the commissioners.

HAPPY HOLIDAY

The story begins in November, 1989, when Michael R. Murray, then director of Microsoft's Networking Business Unit, first floated the merger idea. With Gates's blessing, Microsoft Executive Vice-President Steven A. Ballmer called Noorda and arranged a meeting at a hotel cafe in Houston in early November. "I was surprised," recalls Noorda. "I thought, 'Wow, Gates is really aggressive.'"

At the time, Microsoft's long relationship with IBM was breaking down and Microsoft was in need of a new ally, recalls Ballmer. Noorda liked his independence and told Ballmer so. But he also said he would consider a merger, if only to fulfill his obligation to shareholders. Noorda and Gates got together in late 1989 to outline what would have been a $ 2 billion buyout.

Then, all of a sudden, Microsoft stopped calling. On Jan. 10, 1990, when Noorda says he called Ballmer to find out why, he was told that Gates was worried about the programming teams from the companies collaborating only across a computer network because Gates "likes to roam the halls" and see how the work is progressing. Microsoft says it balked because of potential technical problems in merging the two product lines as well as worries about a challenge from the Justice Dept. Furthermore, "Bill doesn't like doing acquisitions," says Microsoft's Ballmer.

Not surprisingly, Noorda felt spurned, and the seeds of mistrust were planted. He suspected that Gates might have launched the talks mainly to pry secrets out of Novell, a charge that Gates today labels as "slander."

A year went by, and Microsoft's Murray again raised the idea of a Novell merger. The reason? For one thing, despite alliances with IBM and 3Com Corp., Microsoft was getting nowhere in the market with LAN Manager, its competitor to Novell's NetWare, the top-selling program for local-area networks. On July 19, Noorda says, Gates called to restart merger talks. "At first I thought it was a joke," he recalls.

Gates, however, was dead serious. And here's where the motives on both sides get murky. Noorda is convinced there was only one reason for Gates' call: Two days earlier Novell had announced plans to buy Digital Research Inc., a $ 50 million, Monterey (Calif.) software maker whose chief product was DR DOS, a rival to Microsoft's MS-DOS. Digital Research had just 5% of the $ 1 billion market for IBM-compatible PC operating systems, but with Novell as a parent, it could be a more serious threat. Gates says DR DOS had nothing to do with the merger idea.

Noorda met with Gates on a July weekend in the American Airlines Admirals Club lounge at San Francisco International Airport. Gates, according to Noorda, barely bothered to say "hello" as he breezed into the conference room and reiterated his interest in a corporate marriage. "There was only one stipulation," says Noorda. "Gates told me, 'That DRI thing has to go.'" Then, Noorda says he raised the possibility that Washington might block the merger of the No.1 and No.3 players in the market. Gates's reply, says Noorda: "Don't worry, we know how to handle the federal government." Gates denies having made the remark.

SUSPICIOUS

Ballmer agrees that Microsoft wanted to remove DRI from the picture -- but for a totally different reason. It was clear, he says, that a merger with Novell would never get government approval if it included the purchase of Microsoft's biggest MS-DOS competitor. Furthermore, he says, it's absurd to suggest that a multibillion dollar merger was pursued just to eliminate a tiny rival. "The attraction to us was always the opportunity to get the client Microsoft's desktop software and servers Novell's network software to work together in a profound way," he says. "You couldn't, in any sense, justify a deal financially on the DR DOS issue."

Noorda says he once again felt he had a duty to shareholders to explore the opportunity. Novell might have fetched as much as $ 13 billion, a 50% premium over its market value, which had skyrocketed since 1989. Still, both Noorda and Novell General Counsel David R. Bradford say they suspected Gates was merely trying to delay the DRI deal.

By now, the FTC was nearly two years into its investigation, but the staff still felt it had a weak case. It wasn't until a conference call with Novell in December, 1991, that the FTC learned of the Novell-Microsoft talks. During the call, FTC lawyer Norris E. Washington asked Noorda point-blank about his relationship with Microsoft. The Novell chief, who had been playing his cards close to his vest, told Washington about the merger talks. "There was a long silence," recalls Noorda. "It was just very quiet on the other end of the phone."

Soon, in March, 1992, the second Novell-Microsoft merger talks collapsed -- and their relationship turned ugly. Already leery of Gates' sincerity, Noorda says he called off the negotiations when he learned that Gates was also planning to buy data-base maker Fox Software Inc. -- a deal he didn't tell Noorda about. Noorda began cooperating more fully with the FTC, joining companies such as Lotus Development Corp. and Borland International Inc. in helping the government build a case. Soon Microsoft executives had a new nickname for the folksy, avuncular Noorda: "the grandfather from hell." Ballmer now calls Noorda and company "a bunch of wily, shark business people."

Both Microsoft and Novell brought on hired guns to do battle before the FTC. Microsoft picked Patricia P. Bailey, a former FTC commissioner. Novell signed up onetime FTC General Counsel Michael N. Sohn and the Washington public-relations firm of Fleishman Hillard Inc. Worried that the Feds would take no action, Noorda asked Sohn to analyze the prospects for a private lawsuit. Sohn advised that it would be the legal equivalent of Vietnam for Novell.

The cold war between Novell and Microsoft is still in full cry. In addition to fueling the EC monopoly suit, Novell has been instrumental in keeping the FTC investigation alive. Gates learned that the Justice Dept. had agreed to take up the FTC probe just as he was about to address securities analysts at Microsoft's Redmond (Wash.) headquarters. Ignoring the recommendation of his advisers to avoid the topic, he launched into a tirade about the antitrust investigation and an attack on Noorda.

Meanwhile, customers are growing tired of the feud. "They have an obligation to resolve this issue,'' says Ruef of Mobil. If they can't patch up their differences -- and figure out how to make sure their software is compatible -- they stand to lose a lot more than a grudge match. 

GRAPHIC: Photograph, WILLIAM GATES, He wooed Novell on and off from 1989, but now, angered by Noorda's cooperation with antitrust probers, he says Noorda has made "increasingly paranoid political attacks" against Microsoft, because "he has a tremendous vendetta against us" PHOTOGRAPHS BY ALAN LEVENSON; TIM KELLY; Photograph, RAY NOORDA, Despite a liking for independence,  he considered  Gates's offers but now thinks that the Microsoft chief may have initiated the merger talks mainly to pry out of Novell and discourage it from going through with a planned acquisition PHOTOGRAPHS BY ALAN LEVENSON; TIM KELLY

Novell, Microsoft, and the FTC

Copyright 1993 McGraw-Hill, Inc.