Corel-Borland breakdown no surprise

The writing was on the wall for the now defunct merger between Corel and Inprise-Borland, according to some industry followers.

Robert Schieck, president of Richmond Hill, Ont.- based MER Systems, said when Corel posted its Q1 earnings, it announced if the merger didn’t go through it was going to run into money problems.

“That was in March. This deal was running with a late January-February timeline. How in six weeks can they go from ‘Gee, we want to get into bed together’ to ‘Gee, the stability of the lead partner has got a problem?’ How come that didn’t come out earlier?” Schieck asked.

Corel announced the deal had gone south on May 16.

Schieck added that hindsight being 20/20, people now know the deal should never have been made. “We all know Corel didn’t have the financial strength to be involved, so the question becomes why didn’t someone do something six to eight weeks ago?”

Steve Prentice, owner of Toronto-based consultant firm Bristall Morgan, noted he saw the way the deal was headed just from reading the newswires.

“There were doubts in the headlines and as soon as there are doubts in the headlines, you know there are real doubts behind them,” he said.

According to Prentice, the soured merger was a sign of the market maturing and that shareholders are learning they can face these corporate giants.

“Watchdog groups, shareholders, lobby groups or advice groups are equally powerful in saying, ‘Hey, you can’t just merge because you want to merge and get bigger,'” he said.

In a May 16th teleconference, Corel CEO Michael Cowpland called the break-up “amicable.” He stated Corel is now evaluating offers of alternative financing, although he was not forthcoming about what types of financing were being examined.

Equally vague were talks of a new cost cutting strategy that will save the company US$40 million annually.

Cowpland added there were many reasons for the stopped deal, and he cited the rapid movements of the market as one of the factors.

“Basically things change over time and something that looks good at one point in time may change in a three-month period…that’s the nature of the beast,” he said.

Cowpland and other executives also addressed the company’s cash position after a recent filing with the U.S. Securities and Exchange Commission, where Corel stated it could run out of cash in 90 days if the Inprise-Borland deal did not go through.

John Blaine, CFO for Corel, said that situation could only occur if a number of circumstances pile up on one another, but so far that has not happened.

Prentice has his money on Corel. He thinks they are here for the long run.

“Mr. Cowpland is no rookie in this business. He’s built numerous companies and I frankly think he’s in it for the long haul and he can see well beyond these bumps in the road.”

He also noted that with recent viruses, especially the Love Bug and its offspring, people may be looking for other operating systems, that they won’t want to rely on just one any longer.

Because of this, Corel’s Linux-based OS and applications may be the company’s saving grace, he said. “[Cowpland] may have to strip the company down. He may have to get rid of a few of the key areas and focus on the Linux product lines, but overall I think he will be able to grasp the slowly growing trend in customers that there is more choice out there than just Microsoft and that things like Linux will grow in popularity as people realize that they may need to diversify their operating environment. I don’t think Corel is going to disappear,” Prentice stated.

However Schieck wasn’t so sure how Corel was going to survive. He noted the Linux market is uncontrolled and is wide open.

“The rates are low and you need a lot of bodies on the street to make money. I don’t know how they’re going to do it,” Schieck said. “They’ve got about a quarter to survive unless they get a cash infusion.”

He questioned Corel’s decision to cut the US$40 million, saying it was almost too late. “Why now instead of two or three quarters ago?”

He also asked where the money was going.

“Their general administration expenses were up, their costs of goods was up. One of the comments in their quarterly report was that it was because of increased head count and it’s like, ‘You’re hiring people when you’re running on deficits?'”

He said another merger deal between the two companies is definitely not the answer. “Two wrongs don’t make a right. If you’re going to get into it with two companies, to make it successful one of them has to have the right formula. Since they’re both losing money, I don’t think either one of them has the right formula,” Schieck stated.