May 16, 2000 9:10 AM PDT

Corel says in "best interest" to end Inprise deal

Software maker Corel and programming toolmaker Inprise today agreed to end a proposed billion-dollar merger, leaving Corel to find other forms of financing.

The move isn't surprising, as Inprise, formerly known as Borland, recently requested a second evaluation of Corel's financial records.

Ottawa-based Corel has come under hard times, facing dwindling cash reserves and a sinking stock price.

"Much has changed since the merger was agreed to more than three months ago," said Corel CEO Michael Cowpland. "As a result, Corel has concluded that it is in our best interest to terminate this agreement at this time."

Cowpland emphasized that Corel and Inprise have parted on amicable terms. "Although at this point the merger didn't proceed as planned, it hasn't changed our strategic focus," he added.

Corel offered to buy Inprise in February in a stock deal then valued at $2.44 billion. The deal's value diminished, however, after Corel's stock fell from around $20 per share when the deal was announced to the single digits today.

Corel executives said they are now free to evaluate recent offers for alternative financing. The company is also looking at a new cost structure that could save up to $40 million annually.

Its new financial chief John Blaine tried to alleviate fears that the company is close to running out of money. Blaine took over as CFO April 17.

"I do wish to emphasize that Corel has cash in the bank," he said.

While he said he could not go into specifics about restructuring, Blaine said the company will release details in the coming weeks.

Corel is best-known for its WordPerfect word processing software suite, its CorelDraw graphics software, and its recent foray into software based on the open-source Linux operating system.

The company has pushed hard to win the favor of the Linux faithful by transitioning graphics software and WordPerfect to the operating system. In December, Cowpland predicted that half Corel's sales would come from Linux in five years.

Corel executives today emphasized that the operating system is important to the company's future, citing the recent commercial release of WordPerfect 2000 for Linux. They reiterated that CorelDraw for Linux will be released during the summer; Corel released the second beta of the software May 12.

For Inprise, the software development toolmaker suddenly finds itself facing the future as an independent company again.

Inprise, one of the last remaining independent toolmakers, has struggled in a market that has consolidated and seen profits evaporate in recent years.

Well-heeled software firms such as Microsoft, Sun Microsystems and IBM view tools as an important piece of their strategy, but not necessarily a big profit center. The software giants invest millions in tool research, development and marketing but sell them at rock-bottom prices--or even give them away--to seed the market for big-ticket technologies, such as operating systems, database software and high-powered computers.

To combat the lower profits in tools, Inprise has beefed up its product family to include application servers, software that helps run transactions on e-commerce Web sites.

But the company continues to struggle. Last month, Inprise reported a first-quarter loss of $1.1 million, or 2 cents a share, on revenue of $46.5 million.

Inprise executives could not be reached for comment, but some analysts speculate the company will look for other potential buyers.

"They will assert their independence and talk about how they'll do just fine on their own, but the idea of having a bigger brother with a better recent track record of success is not a bad idea," said Zona Research analyst Martin Marshall. "If I were Inprise, I'd look at swinging a deal."

Giga Information Group analyst Carl Zetie said little product benefit would have come from the merger.

"There was little obvious integration between the product portfolios of the two companies," he said. "The two companies are at cross-purposes over their platforms, their operating systems, and their audiences," with Insprise supporting multiple operating systems and Corel betting on Linux.

"No amount of 'positioning' could change that," Zetie said.

Inprise is the long-term loser, Zetie predicted. "There is a very high probability that the failed merger will precipitate the final breakup of Inprise."

Inprise could have faced a nearly $30 million penalty for breaking the deal. But both sides said the agreement was mutual, so no termination fees were required.

Today's announcement also cancels reciprocal stock option deals and binds both companies to a three-year confidentiality agreement regarding intellectual property and other trade secrets.

The termination does not affect software Corel licenses from Inprise.

 

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