Corel Corp. announced on Friday that its board of directors has agreed to an acquisition by San Francisco based investment firm Vector Capital Corp. in an agreement worth US$97.5 million or US$1.05 a share.
During a conference call on Monday, James Baillie, chairperson of Corel’s board of directors, gave reasons as to why the software maker feels an acquisition is in its best interest.
“For the past several years we have had some chronic issues as we battle to reverse the declining revenues from our mature product lines and deliver predictable profitability and fund strategic investments in new business lines,” Baillie said. “In Q1, despite making progress and managing our costs, we continued to face challenges driving revenue growth. While our results were largely consistent with management’s plan, it remains clear that we have a considerable distance to travel in the current economic [time] if we are to deliver the type of growth and profitability necessary to favourably impact the share price.”
According to Alister Sutherland, director of software research for IDC Canada Ltd. in Toronto, this acquisition agreement is further evidence that Corel has been in trouble of collapsing for some time.
“When you have a company that three years ago was worth hundreds and hundreds of millions of dollars and now they can barely get $100 million for it from a group of pretty cagey investors, private investors, I would say that is pretty clear evidence right there. Otherwise they would find another way,” Sutherland said.
Baillie said the company was approached by Vector in March with the news that the investment firm had a 19.9 per cent interest in Corel from shares that it had acquired from Microsoft.
According to Sutherland, Microsoft surprised a lot people when it bought a significant block of Corel shares in October 2000.
After realizing Vectors intentions, Baillie said Corel “triggered an outreach effort to find if there were any competing competitive offers that would be more favourable.”
“We ran a very extensive public auction for the public bid process for the company and there was a thorough and thoughtful examination of all possible options,” Baillie added.
He said the company had a number of approaches from other organizations, but no firm offers.
“We’ve had a lot of nibbles, how many progress through to a serious level of interest would be very few,” Baillie said.
During the conference call, Derek Burney, president and CEO or Corel said that although he is sure the board of directors has secured the most attractive offer possible for the company, not all shareholders feel the same way.
“I’ve received numerous e-mails over the past few days and weeks, some from shareholders that are supportive of the deal with Vector and some from shareholders who are passionate in their opposition to a potential acquisition,” Burney said.
Sutherland said that Burney and company inherited a very difficult situation that was perpetrated by Corel’s founder, Michael Cowpland, “and Burney has done a credible job of trying to turn the company around. It’s certainly in better shape than when he found it.”
Sutherland added that Corel’s troubles are due less to the compnay itself and more because of the IT industry in general.
“The market is mature and saturated now, there’s not the same demand for an upgrade of design programs that there once was. The IT industry is pretty challenged along the broader economy, not so much in Canada but globally,” Sutherland said.
He added that Vector is acquiring Corel for “a bargain basement price” and because of the vested interest that Vector already has in Corel it is trying to “minimize their risk of exposure and maximize the amount of return they might actually get. The broader shareholders may not like it, but I guess it’s better than Chapter 11,” Sutherland said.
Although Burney said that Vector has no plans to take Corel out of Ottawa, Sutherland said the Canadian IT sector would not be devastated if this did happen.
“Not at this point. I think it would have been [devastating] if it happened four or five years ago, but Corel is a small player [today].”
He added that because there aren’t “a lot of legs left in Corel at this point because it has been driven into the ground,” in large part due to the actions of Cowpland, it is possible that Vector may try to get its money back from Corel through its intellectual assets, basically dismantling and then folding the company.
The completion of the acquisition is dependent on approval from both the shareholders and the Canadian courts. If approved the acquisition should become final in July.
Corel can be found online at www.corel.com. Vector can be found online at www.vectorcapital.com.
