MS, Corel deal under scrutiny

If Microsoft’s main objective was to move Corel away from Linux then it has been successful, according to one industry observer.

Perry Glasser, managing editor at Nashua, N.H.-based technology analysis firm Illuminata Inc., said it’s only a matter of time before Microsoft sells off the stock it owns in Corel.

On Feb. 21, Microsoft notified the U.S. Securities and Exchange Commission (SEC) of its intent to convert its preferred issue shares of Corel into common shares. The only reason to do this, Glasser said, is if the company intends to put the stock up for sale. One stipulation of the preferred issue stock, he said, was that it could not be sold until it was converted to common shares.

But as of press time, Michael Eisen, Microsoft Canada’s director of law and corporate affairs in Mississauga, Ont., said there’s no truth to the sell-off speculation.

“There’s no intent to sell the shares at this point; we’re under no obligation to sell,” he said. “This (move) gives us the opportunity to sell if in the future we decide to do so.”

But Glasser believes Microsoft will likely sell in an effort to “wash its hands” of the Corel deal, now that the company is under increased scrutiny by the U.S. Department of Justice (DoJ) and the Competition Bureau of Canada. Late last month, the DoJ and the bureau each launched independent investigations into the deal that saw Microsoft purchase about 24.6 per cent of Corel.

With this latest investigation underway, Microsoft needs “to look virginal and pure” Glasser said, and holding onto Corel now would just add to its legal troubles. He believes Microsoft invested in Corel with the “express purpose of squashing any chances of Linux [ being successful].” He also believes that goal has been achieved.

“If [Microsoft] dumps 25 per cent of the company onto the market, they can ruin it,” Glasser said. And because Corel is a Microsoft competitor, in the operating system arena and within office products, Corel’s fall would be beneficial to Microsoft.

Glasser said the SEC has a rule called 13D, designed to prevent “surreptitious take-overs.” The rule stipulates that any parties purchasing more than five per cent of an organization have to publicly announce that they have done so. But Microsoft paid a high price for the five per cent of non-voting class of preferred stock, and once converted that value is equal to about 25 per cent of Corel, Glasser said. And although Microsoft has no voting rights, it has the right to put the stock on the market “on a whim.

“Microsoft pumped money into Corel, but they did not do that as an act of charity.”

Tough times

The investment in Corel on Oct. 2 came at a time when the Canadian enterprise was enduring a veritable whirlwind of activity aimed at repositioning the company’s strategy and allow for a return to profit.

Shortly after the deal with the Gates empire was cut, interim Corel president and CEO Derek J. Burney was officially handed the key to the camper. Corel then proceeded to axe 139 jobs from its Dublin operations and hired an American business consultation firm to aid in the restructuring. The end result included Corel’s decision to drop the Linux OS from its menu and streamline its focus to core competencies.

Glasser said financially Corel didn’t really have much choice but to accept the conditions of Microsoft’s offer. “They embraced the devil. And lo and behold, now the devil’s out of the closet,” he said.

Corel did not return repeated calls from ComputerWorld Canada.

Chris Le Tocq, a research director with the Gartner Group in Stamford, Conn., said the DoJ is taking every opportunity to keep the pressure up on Microsoft.

“Microsoft has dominance in the desktop operating system space and that’s what has got them in trouble,” Le Tocq said. “It’s important to note the investment Microsoft made in Corel came from the tools division. This is Microsoft’s business unit that is putting out the .NET initiative. Their investment in Corel could be seen as buying DoJ insurance by claiming there is more than one product platform on the market.”

Standard practice

David Ouellet, the acting assistant deputy commissioner of the mergers branch of the Competition Bureau in Hull, Que., said it’s standard practice for the Bureau to review any transaction that falls under the mergers category.

“The acquisition of Corel shares by Microsoft fits into our mandate,” he said. “[This review] has been on the books for a while. Depending on the complexity of the transaction we hope to have our review concluded in a few weeks.”

Ouellet would not comment directly on whether the Bureau has held discussions with the DoJ. He added as a general comment, however, that it’s not unusual for the two agencies to correspond regarding mergers that may affect markets beyond the North American scope.

Eisen said Microsoft Canada is optimistic of the outcome here at home but he would not comment on the DoJ’s investigation.

Kevin Restivo, a research director with IDC Canada in Toronto, said he laughed out loud upon hearing of the investigations by the DoJ and the Competition Bureau.

“There’s no reason to investigate, call the troops back, the battle is over,” he said. “Microsoft has already beaten Corel in the word processor game, the infusion of cash is due to diminishing competition…it’s another case of technology being ahead of the law.”

In retrospect, one has to give credit to Dr. Michael Cowpland. The founder and former president and CEO of Corel Corp. knew when to roll the dice – and it appears he also knew when to walk away from the crapshoot.

Cowpland is twice removed from Corel now, with his resignation from the company’s board of directors on Jan. 25. It seems his timing couldn’t have been better.