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Microsoft to sell stake in Corel

The software giant is preparing to sell its minority stake in the struggling Canadian software maker at a loss of more than $100 million.

Microsoft is preparing to sell its stake in struggling Canadian software maker Corel at a loss of more than $100 million.

Vector Capital, a San Francisco-based venture capital firm, announced this week that its Vector CC Holdings arm has signed an agreement with Microsoft to buy the company's 22.89 million preferred shares in Corel. The deal will be completed by March 24.

Vector will pay about 56 cents a share, according to the announcement, bringing the total value of the deal to $12.88 million. Microsoft paid $135 million in October 2000 to acquire a 24.6 percent share of Corel, best known for its WordPerfect office applications and graphics software.

The deal was seen as a life preserver for Corel, then struggling with the fallout from a failed merger with software maker Inprise, recent executive departures and layoffs.

Microsoft at the time characterized the deal as a strategic relationship to promote its Microsoft.Net initiative to deliver software as Web-based services.

Since then, however, Corel has not played a significant role in Microsoft's .Net efforts and instead has rolled out several initiatives that take aim at Microsoft's dominance of the office applications market.

Paul DeGroot, an analyst with research firm Directions on Microsoft, said that as Microsoft.Net has evolved over the past few years, support in desktop applications--a major goal in the Corel investment--has become less important to Microsoft. And Corel's recent WordPerfect moves haven't built any love between the companies.

"Things have changed a lot since Microsoft made that investment," he said. "Corel has become more of a competitor; they've become more explicit in taking on Microsoft Office."

And with the antitrust case against Microsoft settled, DeGroot added, "There's less of a need for Microsoft to show interest in keeping independent software vendors going."

Jeffrey Tarter, editor of software industry newsletter SoftLetter, said Corel's market share has slipped so much that Microsoft no longer has a reason to be interested in the company. "I think Microsoft's goal when they made the investment was primarily to take away the possibility Corel could fall into some other hands and could become a serious business threat," he said. "They don't have to worry anymore, because Corel has pretty well failed at everything they've done. They're clearly not a player of the office suite market anymore, and the graphics business is in a tailspin."

Corel has posted significant losses in the past few years and has gone through several rounds of layoffs.

While the software maker made a number of high-profile customer wins for WordPerfect last year, the company is pinning much of its comeback hopes on tools that add XML (Extensible Markup Language) functions to common types of documents.

Vector said in a statement that it plans to help build Corel's business. "While we realize that Corel has faced many challenges in recent years, at its core is a solid foundation of advanced products, dedicated and talented employees and loyal customers," Alex Slusky, managing partner for Vector, said in the statement. "We look forward to working with the Corel team to leverage these strengths."

A Corel representative confirmed the pending sale and referred to a statement by Corel CEO Derek Burney. "By becoming the company's largest shareholder, Vector is demonstrating its confidence in Corel's strong business fundamentals and potential for growth," Burney said. "Corel remains focused on achieving profitability in 2003, and we believe that having Vector as a major shareholder will add positive value to our organization."

Representatives from Microsoft and Vector did not immediately respond to requests for comment.