Corel sells out to Microsoft

With apologies to John Lennon, the dream is over.

Corel Corp., the embattled Ottawa-based software purveyor, conceded defeat to its arch nemesis Microsoft Corp. on Oct. 2 when Bill Gates’ empire was introduced as a partner of the fledging Canadian company. The self-described technology deal between the two entities will see Microsoft purchase about US$135 million worth of Corel shares (approximately 24 million shares at US$5.63 each) – a move that caused Corel’s ailing stock to jump by an estimated 83 per cent in early trading on the New York Stock Exchange. Corel shares opened at $10.50 on the Toronto Stock Exchange following the announcement – up $4.95 or almost 90 per cent from the stock’s level when trading was halted on Oct. 2 for the technology deal press conference.

Corel will contribute to Microsoft’s .Net initiative to integrate the company’s software with the Internet. Microsoft now owns about 24.6 per cent in Canada’s largest software manufacturer.

“This adds new life to Corel, and I think Microsoft is so focused on its applications and rolling those applications out to enterprises…this is a huge advantage to Microsoft as they now have a development team for their .Net initiative,” said Kevin Restivo, an analyst with IDC Canada in Toronto. “It remains to be seen if [Corel’s Linux] strategy will continue.”

Tom Button, general manager of Microsoft’s developer division, said the deal was a strategic manoeuvre for the Redmond, Wash.-based conglomerate.

“We think Corel is really in a good position to do great things on a .Net platform,” he said during the press conference. “We think [Corel is] an attractively valued company.”

Corel also confirmed interim president and CEO Derek J. Burney as a permanent fixture at the company’s helm, hours after the deal was ratified. Burney said he regarded the deal as an opportune one for his company to bring its products to an on-line environment, but he was vague in describing which Corel programs would be adopted by Microsoft’s .Net platform – a means by which customers can rent software over the Web.

“We’ve seen the Web as a place where we want to put a phenomenal amount of effort,” Burney said. “This alliance is going to make that really work.”

With the news of the former rivals hopping into bed together, the end of Canada’s answer to Microsoft was immediate.

Putting issues to rest

It also raised some concern amongst devout Corel users over the company’s future independence. In addition to working together, the two companies have also agreed to settle unspecified legal issues between them. When pressed for a clarification, Burney hinted that there were unresolved issues over Visual Basic for Applications licensing, although he said Corel had not initiated any legal proceedings against Microsoft.

“Both Corel and Microsoft have not commented on how their relationship will affect Corel’s Linux development and that is a concern,” charged Rob Black, president of the Canadian Information Processing Society (CIPS), Toronto Section. “Competition between Linux and Microsoft Windows NT would increase quality in both platforms. However, for Linux to become viable, it needs software applications offered by Corel.”

In 1997, Microsoft invested US$150 million in Apple to prevent its then-struggling competitor from going belly-up. The agreement was criticized vehemently by Apple enthusiasts who accused the founding company of Macintosh computers of selling out.

“What this deal does is it gives Corel time, much like it gave Apple time to recover and get some new products out there,” defended analyst Rob Enderle of the Giga Information Group in Santa Clara, Calif. “It gave Apple the opportunity to implement change, that’s all a cash infusion does for a company, it gives them time to recover…all this does is provide Corel with some breathing room since they were likely to run out of cash by the end of the year much like Apple did in 1997.”

Future unclear

Former Corel CEO and founder Dr. Michael Cowpland spent much of the 1990s fighting with Microsoft for word processor supremacy via MS Office versus Corel’s WordPerfect Suite. The battle cost Corel millions that they’ve yet to recover from and which led to Cowpland resigning from Corel last September amidst the company’s flagging fortunes.

As Black suggested, what isn’t clear in the wake of the deal is the longevity of either Corel Linux or the WordPerfect Suite in the .Net context.

“Corel is now on life support and it’s not clear if they will recover, but if they use the time effectively there’ll be continued life in the company and in WordPerfect Office,” said Enderle. “Microsoft realized it’s not good for Corel to go under now as it certainly won’t help their appeal before the courts – it’s a much better situation for Microsoft if Corel is in business.”

The company – which cut its debt load by US$40 million and 139 jobs at its facility in Dublin, Ireland last month – will retain the freedom to develop its own products including those competing with Microsoft, Corel said. Button echoed the Corel statement by pointing out that Microsoft would have no control over the company, no seats on its board of directors and no involvement in its management. He added Microsoft is only interested in Corel’s research capabilities and applications.

“This puts off Corel’s cash flow problem. It’s a stick thrown to a drowning man,” said Chris Le Tocq, a senior analyst with the Gartner Group Inc. in Stamford, Conn. “Corel needs to find a viable business model out of the .Net initiative.”

Le Tocq predicted Corel Linux will fall by the wayside, while WordPerfect users can expect to find integration and/or transition to MS Office an inevitability.

“Putting applications on Linux always was a gamble, the Linux desktop in the U.S. is a non-starter,” he said. “Microsoft’s concern with the .Net initiative is that if MS Office is the only application running on it, that puts them in hot water with the DOJ (U.S. Department of Justice), but if they can point to WordPerfect users as well, then it’s less of a concern.”

Black’s concern for Corel’s brand of Linux may be in vain.

“What we’d like to see is Corel and Microsoft issue a statement positively confirming the ongoing support and commitment to Linux,” Black said.

Protective measure

Despite the soaring value of Corel’s stock, skepticism remained about Microsoft’s true intent behind the deal. The Ottawa Citizen hinted that the big reason for the greenback olive branch from Gates’ headquarters appeared to be an attempt to protect Microsoft from previous charges of monopoly. By propping up Corel, as it did with Apple, Microsoft can show that it still has competition. Microsoft’s appeal of the monopoly conviction is still before a U.S. federal court.

“It won’t be useful for the current court case,” countered Le Tocq. “The Microsoft perspective on Corel is their WordPerfect user base, and being faced with the possibility of someone else acquiring it to kick start an application for Web-based purposes…someone like Sun or IBM for example.”

On Sept. 20, Corel had announced it was confident an unnamed investor was close to purchasing about 14.7 million shares of the company’s stock. Le Tocq was in the dark as to whether or not Microsoft was that mystery investor, but he added that the writing is on the wall for Corel as an independent entity.

“Our assessment was that as soon as Cowpland was gone, Corel was an acquisition candidate, and we warned our clientele that something like this would happen,” he said. “Not in the immediate future, but in the long term – about two or three years from now – [a full-blown take over of Corel by Microsoft] is probable.”