Ailing Corel's shares soar on Microsoft infusion

Shares of Corel jumped 83 percent in early trading today after rival Microsoft invested $135 million in the struggling software maker.

Meta Group says the deal is Microsoft's side bet on the Linux market and could be the start of an MS strategy to port its .Net technology to Linux in a controlled way. see commentary

Has Microsoft saved Corel? Corel CEO Burney

Software giant Microsoft yesterday invested in its rival in the software application market under a new strategic relationship centered on Microsoft's so-called .Net initiative. The news sent Corel shares on a positive joyride in early trading today.

Shortly after the opening bell, Corel shares advanced $3.06 to $6.75 on heavy volume of 4.7 million shares.

Corel, which recently saw its founder and former CEO Michael Cowpland abruptly resign, has been in dire financial straits since the the collapse of a proposed merger with Inprise. Under the deal with Microsoft, the Redmond, Wash.-based software giant has bought 24 million shares in the Canadian company. The purchase gives Microsoft a 24.6 percent share of the company, but without voting privileges.

In turn, the two companies will work together on developing and testing products for Microsoft's .Net effort, which lets customers "rent" software over the Internet. Microsoft.Net will also encompass cell phones and handhelds computers.

The two companies have also agreed to settle unspecified legal issues between them.

The deal was attractive to Microsoft both financially and strategically, said Tom Button, general manager of Microsoft's developer division.

"We think Corel is really in a good position to do great things on a .Net platform," Button said, "and we think they are an attractively valued company."

Corel interim chief executive Derek J. Burney said the company was already looking for ways to take its programs--including Corel Draw, WordPerfect and Corel Linux--onto the Web.

"We've seen the Web as a place where we want to put a phenomenal amount of effort," Burney said. "This alliance is going to make that really work."

Burney did not give details, however, on how the programs would be adapted for .Net. Burney said Corel had no specific plans for how it will use the cash infusion.

"Obviously, it puts an end to concerns people might have," Burney said.

The news will likely be greeted with surprise. Corel was one of Microsoft's more vocal critics, embracing the Linux operating system, a growing competitor to Microsoft's Windows.

In April 1999, for instance, then CEO Cowpland said Microsoft's Windows was overpriced and would soon be challenged by Linux.

"In the next 10 years, we think Linux can be as successful as Windows has been over the last 10 years," Cowpland said then. "It's going to be just like Windows without the tax...Windows is 25 percent of the cost of materials, which is clearly too much."

Corel came to prominence with Corel Draw, a graphics program for Windows. In recent years, however, it has tried to compete against Microsoft, first in the applications market and later as a distributor of the Linux operating system. For a time, Corel also promoted Java-based applications.

The company has been losing money and market share in recent quarters. This past May, a merger with Inprise, formerly Borland, was called off, a move that would have given Corel a much-needed cash injection. Since then, Corel has steadily been laying off employees.

One motive for the investment could lay in keeping Corel alive so that Microsoft can claim it faces compeition during its ongoing antitrust litigation, speculated Rob Enderle, an analyst with Giga Information Group.

In 1997, Microsoft invested $150 million in Apple. At the time, Microsoft was facing preliminary investigations into its business practices. Like Corel, Apple was Microsoft's competitor, but a stuggling one, at the time.

"They didn't want Apple to go away as a major competitor and they probably don't want Corel to go away right away, especially when things are on appeal," Enderle said. The deal may also give Microsoft access to in-house technology at Corel, including some Linux technology.

As to how the deal came about, Button said he had worked with Burney in the past and sent him a congratulatory email when he was named as interim chief. Button said he invited Burney to come to Microsoft's offices to learn about .Net, an invitation Burney accepted. "He (Burney) got real excited about it," Button said.

Burney said he hoped the deal would mark a turning point for Corel in its relationship with Microsoft.

"Both companies have had their ups and downs in the relationship in the past," he said. "This alliance represents a new chapter."