Microsoft Kills a Flock of Birds with One Stone

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Microsoft Kills a Flock of Birds with One Stone
R. Krause - October 12, 2000

Event Summary

[Source: Corel press release]

October 2nd, 2000 - Corel Corporation and Microsoft Corporation announced that they have formed a strategic alliance that will see the two companies expand their relationship to encompass projects related to Microsoft's new .NET initiative.

As part of this expanded relationship, Microsoft (MS) has purchased 24 million non-voting convertible preferred shares at a purchase price of U.S.$5.625 per share or a total purchase price of U.S. $135 million. The companies will also work together to support the development, testing and marketing of new products related to the .NET platform. Joint-marketing initiatives will include participation in product launches and trade show events and representation on mutual Web sites. In addition, both companies have agreed to settle certain legal issues between Corel and Microsoft.

"We are pleased to announce this latest development in our relationship with Microsoft, and what we believe to be an important step forward in our strategy for long-term growth," said Corel's interim President and CEO Derek J. Burney.

While neither Microsoft nor any of its affiliates are entitled to convert the preferred shares, they will be saleable to, and convertible by other parties, into an aggregate of 24 million common shares of Corel. Based on the number of shares currently outstanding, the common shares issuable upon conversion of the preferred shares would represent approximately 24.6 per cent of the outstanding Corel common shares after the conversion. The preferred shares do not carry any preferential dividends over the common shares.

Market Impact

This has a number of implications - both speculative and actual:

  1. Ends the legal battle between MS and Corel

    We don't imagine the full $135 Million went toward settling the legal stuff, but it's yet another step in Microsoft's attempt to eliminate all their legal woes. We do imagine that Microsoft would love to settle the DOJ case for as little as $135 Million.

  2. Provides MS (after a fashion) with a Linux offering

    There is persistent speculation that MS is looking into Linux. Gaining access to Corel Linux (although not mentioned as a driver for the deal) offers the following possibilities:

    • It's the latest in the "embrace/extend/extinguish" (E3) practice about which MS-bashers have complained.

    • It gives Microsoft a foothold in the Linux desktop space. Although Linux only has single-digit market penetration on the desktop, Corel's is considered to be the easiest to install. Having this product in their "stable" would conceivably allow MS to ramp up Linux more easily.

  3. Gain support/infrastructure for the .NET initiative.

    Every little bit helps. This also could conceivably lead to an E3 strategy for .NET having a Linux component. If Corel Linux becomes a standard - or MS pushes it as the "de facto" standard - Microsoft's battle to control yet another part of the Internet may be half-won.

  4. Keeps Corel afloat, implying that MS still has competition in the office suite area.

    Conspiracy theory time. During their anti-trust trial, MS used the AOL/Time-Warner merger as an argument that competition in the OS/software space is alive. By helping to keep Corel from Chapter 11 (or whatever they call it in Canada), the fig leaf of OS and office suite "competition" is maintained. Actually, we think there is some credibility to this belief.

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