How old chums cobbled up the MS Corel deal
And how you control a company without needing voting shares...
Analysis There are several theories as to why Microsoft did a deal with Corel, but neither a Linux-based liaison nor assuaging antitrust concerns stand up to serious examination. On the antitrust front, Microsoft is probably more concerned about its PR image vis-a-vis the punters than the court of appeals. There are some clues about the real reason for the apparent chumminess if we look at how the deal came about - and especially at what remained unexplained after the analyst call.
Following former CEO Mike Cowpland's resigation in mid-August, Microsoft's developer division general manager Tom Button emailed Derek Burney to congratulate him on being made interim CEO/president. (Not surprisingly, the Corel board confirmed his appointment yesterday.) The two had had a working relationship since they worked on a licensing deal. Burney's response resulted in an invitation to Redmond and a brief .NET briefing, with the result that the Microsoft investment was hatched.
Curiously, Microsoft's 10 per cent stake in Inprise/Borland would have given it a stake in Corel earlier, had that merger gone ahead. From Microsoft's point of view, the departure of Cowpland was important, since he had proved to be an implacable opponent, which begs the question as to whether there had previously been hints about Microsoft's desire for a deal, if Cowpland stood down. Ironically, Cowpland is one of the big winners from the deal, in view of the size of his shareholding.
As a result of the deal, Corel is now worth around $550 million - up from some $250-$300 million when a US institutional investor offered about $56 million for a stake of nearly 20 per cent. Microsoft bought 24 million non-voting shares at $5.625 - a premium of 52 per cent. Button claimed that had Microsoft bought them on the open market, the price would have been higher. As Microsoft no doubt anticipated, Corel's shares rose to $5.781 at the close last night, giving a $3.75 million profit yesterday. Microsoft had no intention or desire to acquire Corel, Button said, but he did not elaborate on the regulatory problems that would almost certainly have prevented this.
Control without control
It is somewhat unusual that Microsoft does not have voting shares, will not have a seat on the Corel board, nor any control over its management, so it must be confident as to how Corel will be corralled. The answer may be that Microsoft can sell the shares to anybody - and they would then be convertible to voting shares.
Corel still has in place its $56 million backup equity line of credit, and would draw on this if necessary, Corel said. Microsoft's cash has been injected, so that immediate cash problems are solved. There is an expectation of Corel returning to profit either later this year (which may be optimistic) or early next year, following the sacking of 470 staff, cutting advertising, and the anticipated delivery of the next version of CorelDraw for Windows in November.
The intriguing part of the press release announcing the deal was a comment that "both companies have agreed to settle certain legal issues between Corel and Microsoft". When questioned, both Burney and Button repeatedly denied any current legal issues between them, but it is possible to see a plausible reason for both the wording of the release and the denial of there being legal issues.
Stop suing governments?
Last year, Corel won US$6.7 million against the Canadian government over the latter's failure to following correct tendering procedures in awarding a contract to Microsoft for Office, and followed this up with a suit against the US Department of Labor "to ensure that the United States government follows its own rules for open and fair procurement", rather than specifying MS Office. Corel has some small but healthy WordPerfect niche markets (for example, with lawyers - even Microsoft's outside lawyers for the trial use it).
It would seem likely that there is at least an oral agreement that Corel will not start any more such lawsuits to queer Microsoft's pitch in the corporate marketplace. In exchange, Microsoft may have agreed not be too aggressive in Corel's niche markets. If Corel were disobedient, Microsoft would only have to sell its shares to destabilise Corel, so there would be no need for any such understanding to be included in the legal documentation - or in those pesky emails of course.
Burney claimed that Corel would continue producing its applications for other platforms, but neither he nor Button were prepared to talk about how an operating system like Linux could become part of the .NET platform, despite Burney's enigmatic "just might" response to a question as to whether Linux would appear on .NET. Button repeated that there were "no plans" to produce Office for Linux.
Everything therefore does seem to point towards Microsoft wanting to gain developers for .NET, although Burney acknowledged there was no expectation of any Corel .NET product before the end of 2001. The recruitment of Corel smacks of wanting it inside the tent pissing out, rather than the other way around. ®