The failed merger between Corel and Inprise/Borland would appear to leave a question mark over Corel's financial future as it now searches for alternative financing.
The deal was intended to transform the ailing office and graphics applications company into a "Linux powerhouse", but Corel announced the termination of the merger on 16 May.
Its future had hung in the balance since 28 April, however, when the Inprise board of directors asked its financial advisor, Broadview International, to update its opinion as to the transaction's financial fairness to Inprise/Borland shareholders.
From the outset, Inprise/Borland shareholders were opposed to the merger, and the board became jittery following the sharp decline in Corel's stock price. It fell to $7 last week from about $20 when the deal was first announced. This followed the company's announcement of a $12.4m loss for its first fiscal quarter, and statements about its worrying cash position and near-term financial prospects.
According to Dale Fuller, Inprise's interim president and chief executive, the first signs of trouble came with these poor financial figures.
"In the first quarter, Corel missed its financial model, which skewed the picture going forward, and it announced it was going to miss the next two quarters at a greater percentage, so it started lopsiding the model. At the same time, it was running out of cash. That caused us a big concern about the ability to discipline and manage the business," he claimed.
Corel has also been dogged by a long-running insider trading suit against Michael Cowpland, its president and chief executive, which dates back to 1997. This is unlikely to be resolved before the end of the year.
In a teleconference held by Corel, Cowpland expressed his disappointment that the merger was not going ahead. He claimed this was due to significant changes in the three months since the merger was agreed, but would not be drawn on exactly what these changes were.
He added that termination fees have not been paid, because the decision to end the merger was mutual and the two parted amicably, but that Corel was now in the process of evaluating offers for alternative financing.
John Blaine, Corel's chief financial officer, also outlined the company's plans to restructure "for future growth". "I want to emphasise that Corel has cash in the bank and we have an aggressive cost savings plan that will enable us to realise savings of approximately $40m on an annualised basis," he said.
Yet he repeatedly refused to divulge what type of alternative financing was under consideration, or whether the restructuring would result in any job losses.
But Carl Zetie, an analyst at Giga Information Group, claimed the termination of the merger is a huge setback for Corel in particular, and that both companies are now in "deep trouble" as a result. "Corel now has a cash crisis; it is going to have to restructure. There will be layoffs and it desperately needs to find more finance, so it is in the hold of the ship baling like crazy," he said.
It is "certainly possible" that Corel could go under unless alternative funding is found fast, he added, or the company could find itself the subject of an acquisition. "With its stock low, it has no leverage to purchase anybody else, and instead of being a buyer it now looks like a target," he said.
But Chris le Tocq, an analyst at Gartner Group, does not believe the company should be written off yet, although its cash position means the termination of the merger agreement is not good news. "I'm sure Corel can get more cash, the question is the terms," he said, pointing to the company's acquisition of MetaCreations as a smart move that provided it with access to the Mac graphics market.
The company also has a substantial franchise with CorelDraw and its office application, WordPerfect, added le Tocq.
At the teleconference, however, Cowpland insisted that the company still intends to pursue its Linux strategy and hopes to generate $30m in Linux-related sales over the course of the financial year ending in November.
But le Tocq is sceptical. "Porting Corel applications to Linux is a great achievement and if there was a desktop Linux marketplace, it would be in a great position. Investors decided that the future is not in their hands, it's in the Linux market taking off and that's not something that's anticipated to be a huge success," he said.
Meanwhile, Corel is due to report its second quarter financial results on 19 June, by which time financing sources are likely to be finalised and the company's restructuring plan will have been determined.
Giga's Zetie, however, claimed that for Inprise/Borland the termination of the merger will come as a great relief and will prevent it from "getting into an unhealthy marriage".
"The merger never made any sense, and when I talked to Inprise it never gave me any credible reasons why this merger was good for Inprise," he added.
According to Inprise's Fuller, the combination of Corel's desktop productivity applications and Inprise/Borland's software development tools would have created a Microsoft without the operating system.
But Zetie said: "Dale Fuller has said that it's back to Plan A, but how can anybody put faith in Inprise's strategic direction [when] the company is clearly up for sale and the only question is for how much."
Although Fuller denies that Inprise is for sale in whole or in part, he added during the teleconference that anything is possible in this industry. "We will continue to execute our strategy and our mission, which is to develop applications that people can run on various platforms across the internet, and also to generate profit and build ourselves an operational model to make money for our shareholders," he said.
While Zetie believes that Fuller is likely to step down as chief executive because he was brought in to sell the company but has not pulled it off, Fuller himself claimed that he would continue as interim chief executive, although he did not specify for how long that would be.
In contrast, Gartner's le Tocq feels that, thanks to the increase in Inprise's stock value over the past few days, Fuller's position as chief executive is secure.
But he believes that if Inprise is sold, it is likely to be sold in pieces, with Visigenic as one business and the development tools, including Jbuilder, as another. "If I were a user of Visigenic products, I would be having some sleepless nights," he said.
Fuller, however, said that Inprise is on target to move back into profit by its third fiscal quarter, and that it is in the best financial shape it has been in for seven years. He added that if the company was sold, in pieces or otherwise, all products would continue to be supported.
Don Magie, an Inprise shareholder who campaigned against the merger, hopes the company can now move forward. "Many believe that the stock will go up quickly, and even I have dreams of that, but the reality is that new management is needed and a new board of directors is the only way to achieve that," he said.
"I am hoping that shareholders continue to pay attention long enough to let management know that they will vote out the board and put in responsible, committed people," he added, explaining that he thinks the governing of the company has been weak for the last three to five years.
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