January 31, 1996 6:00 p.m.

Corel deal with Novell answers one question, raises others

By Charles Cooper

One big question got answered earlier today when Corel Corp. agreed to pay about $186 million in cash, stock, and royalties for most of Novell Inc.'s business applications.

The deal, which is expected to close within the next 30 days, put the final coda on Novell's three-month auction of its troubled applications business and marked the final phase in CEO and Chairman Robert Frankenberg's strategy to return the company to its roots.

"This allows Novell to focus on what we do best--and that's networking," said Frankenberg during the course of a telephone conference call this morning. In September, the company sold its Unix business to The Santa Cruz Operation Inc. and one month later put the former WordPerfect and Quattro Pro lines--which Novell acquired in 1994 for about $980 million--up for sale.

The agreement calls for Corel to pay $10.75 million in cash and 9.95 million shares of its common stock to Novell. Corel will also pay a minimum $70 million royalty to license GroupWise, Envoy, and 'other technologies' from Novell over the next five years. In return, Novell, which will own about 20 percent of Corel's common stock, will receive a seat on the company's board.

The sale will catapult the Ottawa-based company, which posted $196 million in revenues during its last fiscal year, into the second largest independent supplier of PC software in the industry.

But some analysts cautioned that it also puts Corel on a collision course with Microsoft Corp.

"It's a good deal for Corel from a financial standpoint. They certainly haven't overpaid for the product line. They also made a very firm commitment to get in bed with Novell, which is the leading networking company," said Howard Liss, an analyst with Griffiths, McBurney & Partners, in Toronto. "But they're going head to head on a number of fronts with Microsoft. The marketing battle may prove more costly than they imagine."

Corel CEO Michael Cowpland brushed aside suggestions that he was charting his company into dangerous waters. He said the Internet hooks in the upcoming WordPerfect suite, slated for release this April, would clearly differentiate Corel's products from competing products sold by Microsoft.

"We have a chance to be the first suite out [on the Internet] platform," Cowpland said.

With the deal, Corel will roughly double its revenues and head count, picking up about 660 people, most of whom will be working in R&D; and product support. With the extra costs, Corel expects to take about a 4 percent hit on gross margins over the next three years.

Novell, which over the last year has laid off about 600 of the 1,800 employees involved in its business applications group, indicated that the fate of about 500 jobs remains unresolved. The two companies will decide their fate within the next 90 days.

Corel will retain the product names but change the packaging, Cowpland said.

"This is a very good price, especially when you consider what IBM paid for Lotus Notes," said Frankenberg. "We are very pleased with the results."

Corel, which had been involved in talks with Novell for the past couple of months, beat out a higher offer from Bain Capital, according to sources, who said the Boston-based financial company offered $200 million for the business applications.

Frankenberg, who did not identify any other suitors, said Novell chose Corel over "several qualified buyers." He added that Corel was selected because of its "commitment to the future of customers, its commitment to the future of products, and its commitment to our people in Utah, who develop those products."

"Most of the large customers have lost faith in the future of the apps because of the attitude of Novell in the last six months," said Ad Rietveld, the former president of WordPerfect who resigned from Novell in March 1995. "I think Corel is up for a huge job.

"If Corel will focus on the consumer market, then the apps would have found a real good home," he continued. "If Corel wants to sell the products at a low price to everyone with a PC at home, they know how to do that. But if they want to continue dealing with large customers, then I think they would either have to change the way they do business or they will have to surprise me."

In early afternoon trading, Novell's shares were up .875 to 13.375.

Copyright (c) 1996 Ziff-Davis Publishing Company. All rights reserved. Reproduction in whole or in part in any form or medium without express written permission of Ziff-Davis Publishing Company is prohibited. PC Week and the PC Week logo are trademarks of Ziff-Davis Publishing Company. PC Week Online and the PC Week Online logo are trademarks of Ziff-Davis Publishing Company.