The company said on Saturday that its board had considered the proposal in the light of a review by its independent financial and legal advisers and concluded that it was inadequate and undervalued Novell's franchise and growth prospects.

Elliott Associates and a related firm, Elliott International, are the third largest owners of Novell stock, holding about eight percent.

Elliott's offer, of a total of $US2 billion in cash, represented a 37 percent premium on the share price of January 4 and a 20 percent premium on the price of March 1. It was made shortly after Novell announced its results for the first quarter, indicating that its Linux business was at a break-even point.

Novell also announced that its board had authorised "a thorough review of various alternatives to enhance stockholder value."

It said, "these alternatives include, but are not limited to, a return of capital to stockholders through a stock repurchase or cash dividend, strategic partnerships and alliances, joint ventures, a recapitalisation and a sale of the company."

Novell signed a patent-licensing deal with Microsoft in 2006, in a bid to turn around its fortunes and return to the days when it was doing well. But the partnership has so far failed to bring the company out of trouble.