Inprise lawyers seek to block opposition to Corel merger

Shareholder's employer threatened over anti-merger Web site

A campaign to derail the Corel-Inprise/Borland merger has attracted the attention of Inprise's learned friends, probably because of some interesting revelations rather than as a result of the campaign seriously threatening the deal. The reason for the aggro is that Corel's share price has dropped dramatically since the announcement of the merger on 7 February, thanks to Corel's disappointing results and warning of two poor quarters to come. Consequently, Inprise shareholders will find that the value of the Corel shares that they are to receive is likely to be considerably less than when the deal was announced. The $1.1 billion in shares that the merger was to have cost Corel has now shrunk to $567 million at yesterday's closing price for Corel's shares. Don Magie, a Toronto-based investor who holds 40,000 Inprise shares, has started a Web site to rally support for renegotiating the deal. He discovered that Inprise had signed two deals before the proposed merger was announced, but that Inprise did not announce them, which could well be a breach of SEC rules. The first deal was signed with Ericsson before Christmas (but announced 23 February), with Inprise being chosen to supply its Visibroker CORBA technology for Ericsson's operation support system, for managing GSM and CDMA networks. The other deal, with TurboLinux, was signed in January (and announced 16 February, around the time that TurboLinux received $57 million of second-round financing) and is a strategic alliance whereby the companies would collaborate on the certification, integration, enhancement and marketing of Linux products worldwide. The implication is that Inprise's share price might have risen before the merger was revealed, had the deals been announced earlier, and so Inprise shareholders might have received a better offer from Corel. Magie claims to have the support of some ten per cent of Inprise's shareholders, including Robert Coates, a former member of the board, who resigned in opposition to the merger. Merger opposition Magie's efforts to enlist Inprise shareholders to vote against the Corel merger resulted in a letter from Inprise's lawyers, but the letter was addressed to the general counsel of his employer rather than to him personally. Here's where the situation becomes murkier. According to an article in the Ottawa Citizen, Magie works for CompuWare in Canada, a US company that is currently the number five software vendor, and which sometimes competes in the same marketplace as Inprise. Although the Inprise letter says Magie is "currently engaged in a very public campaign to derail the proposed Inprise/Corel merger" and that Inprise it is reviewing "whether Mr Magie's statements and actions are in violation of the US federal securities laws" (especially the proxy rules of the 1934 Securities and Exchange Act), the clear intention of the letter is try to put pressure on CompuWare. The flimsy excuse given for writing to CompuWare is that the company is named in the Ottawa Citizen's report. A further implication is that CompuWare should consider its own position, and whether Magie should remain an employee if he refused to stop his campaign. It is not known whether Magie has some puts against Inprise, to lock in profits. There is considerable negative sentiment in the newsgroups against Corel CEO Michael Cowpland, whose personal trial on allegations of insider trading by the Ontario Securities Commission has been moved to Ottawa from Toronto, and will not now take place before the end of the year. Of course, when the Corel share price took off following the Corel Linux release, the protests were nowhere to be heard. At the same time, if Corel's share price rises (it has happened unexpectedly before), all would be sweetness and light. The snag is that this is not likely until much later in the year. Corel's share price closed yesterday at $10.562, down from $20.00 the day before the deal was announced. Merger benefits For Corel, the deal is a sweet one since it gets its hands on Inprise's $197 million in cash (as of 31 December), of which $100 million came from Microsoft when it took a stake in the company as a result of what was suspected to be a settlement for having enticed Borland executives to leave, by offering golden sunrise awards if they quit Borland and went to Microsoft. The payment was supposedly for "a one-time licensing fee", though it's not clear what technology was supposed to be licensed. For Inprise, the present situation is one of very bad news, with its share price effectively tied to that of Corel as a result of the merger deal, when it was agreed that Inprise shareholders would get a fixed rate of 0.747 of a Corel share for each Inprise share. Should the deal not go through and Inprise shares continue to drop, Inprise could momentarily find itself in the strange position of its cash being worth around as much as its market capitalisation. Inprise's share price was around the $4 mark until last October, when it shot up to $16 in December. When the deal was announced, Inprise's shares were valued at $14.94 as a result of the deal. They have now drifted down in tandem with Corel's fall to $7 last night. Newsgroup messages have been very much opposed to the deal, with the arguments being focused on the significant cultural differences between Inprise and Corel. It is true that Corel has no significant experience of enterprise market products, but the criticism seems to ignore the fact that there has been no indication that Inprise's marketing staff are being terminated. Indeed, the merger creates a broad software company that has the potential to increase its present turf quite considerably. As is usual in such mergers, there are tough sanctions in the event that either side unilaterally decided to pull out of the merger. The SEC Schedule 13D filing shows that if Inprise terminates the deal, Corel would receive a termination fee of $29.5 million, while Inprise would receive $44.5 million if Corel terminated the deal. At the moment, Inprise probably has the reluctant support of most of its shareholders, but this could change as the termination fee is not so great. However, the consequences to Inprise as a result of withdrawing would probably be considerable, and make it an immediate target for a takeover, resulting in further instability. Indeed, both Corel and Inprise are vulnerable to a hostile bid at the moment. Merger merits There is merit in the Corel-Inprise deal at the right price, and so a renegotiation would appear to be a sensible possibility. There was a report last week in that the companies were having talks about adjusting the terms of the deal. Inprise chairman William Miller of Stanford University was quoted as saying that there were "a lot of conversations going on" between the companies. So far as Inprise's lawyers' clumsy intervention is concerned, as one commentator put it: "The best way to incite a real revolution is to try to suppress it." ® Link Don Magie's Inprise meger site is here

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