Microsoft will sell its 25% stake in Canadian software company Corel, taking a loss of more than US$120 million. The sale, to San Francisco–based venture capital firm Vector Capital, brings to a close a curious relationship that never jelled, and that was overtaken by changes in the marketplace and in Microsoft's priorities.

Context of the Buy

The terms of Microsoft’s Oct. 2000 investment called for Corel to use .NET technologies in its products and to assist Microsoft in porting .NET to other operating systems, such as Linux, if Microsoft requested.

Microsoft never offered a detailed explanation of why it purchased a stake in Corel, but several factors, including the following, likely played a role:

• Microsoft was in the midst of its antitrust fight with the U.S. Department of Justice (DoJ) and saw some value in ensuring that its weak competitors in the desktop applications market did not disappear entirely, leaving Microsoft in an even more dominant position
• The .NET initiative was just getting under way, and Microsoft wanted other software vendors to support it
• Corel had a program under way to port WordPerfect and other applications to Linux, and Microsoft might have been concerned that this would popularize Linux as a desktop operating system; an alliance might have tempered this effort or, alternatively, allowed Microsoft to enlist Corel's expertise to port Microsoft products to Linux.

Context of the Sale

Many things have changed in the two years since Microsoft purchased its stake in Corel:

• Microsoft’s settlement with the DoJ reduces the need to support competitors for the sake of competition
• The .NET Framework proved to be less important for desktop applications than for server and Web applications; Microsoft itself makes little use of the .NET Framework in desktop applications
• The work of porting some parts of the .NET Framework (the C# language and the Common Language Infrastructure) to the FreeBSD operating system with Corel’s help appears to be complete; this has helped Microsoft in its quest to get the ECMA standards body to endorse C# as a technical standard.

Finally, Corel’s business has gotten worse, and it has largely abandoned its interest in Linux.

Corel the Competitor

Instead, Corel has become more of a direct competitor with Microsoft, advertising liberal licensing schemes designed to take advantage of customer dissatisfaction with Microsoft’s volume licensing programs, and winning deals with OEMs to replace Microsoft’s low-end Works suite on new PCs with Corel’s WordPerfect Productivity Pack.

Corel is also competing with Microsoft’s efforts to position Office as a client for XML Web services. Corel, which purchased an XML development and authoring product, XMetal, in the late 1990s, has built similar XML capabilities into WordPerfect.

The net result is that few avenues remain for joint development or marketing initiatives, and the investment no longer offers the possibilities it once did.

The Purchaser

The purchaser, Vector Capital, is a San Francisco–based technology investment firm that manages about US$200 million.

Vector’s backers include Credit Suisse First Boston Investment Partners; General Electric Equity Capital; J.P. Morgan Alternative Asset Management; the Massachusetts Institute of Technology; Perot Investments, which represents Ross Perot of Perot Systems; Vulcan Ventures, owned by Microsoft co-founder Paul Allen; the Ziff family (former owners of Ziff-Davis Publishing); and other individuals, funds, and groups.

Vector will pay US$12.88 million to buy Microsoft’s 22.89 million preferred shares in Corel, a price of about 56 cents a share for shares that Microsoft purchased for about US$5.62 each. The deal is expected to close by March 24.

Resources

Vector Capital is at www.vectorcapital.com. Corel is at www.corel.com.

Microsoft’s purchase of Corel stock was described in "Strategic Agreement with Corel" on page 17 of the Nov. 2000 Update.