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  Corel is our latest takeover candidate

BENJ GALLANDER and BEN STADELMANN

Friday, March 28, 2003

One statistic we are particularly proud of is our streak of at least one company in the portfolio taken over in each of the past 10 years. Besides the hefty profit that these deals normally bring, we see it as an acknowledgement of our ability to sniff out good value. Though we don't like to count our chickens before the deal is hatched, Corel Corp. is definitely in play.

The ball got rolling when San Francisco based Vector Capital, one of those fancy venture capital firms, bought Microsoft's 20 percent interest in Corel at 56 cents (U.S.) a share, for a total of $13 million. Ordinary folks who took a bath in the tech wreck might take some small solace from learning that the supposedly big brains from Redmond paid $135 million for these shares less than three years ago — a whopping 90 percent loss. But heck, those cats probably count it as petty cash.

Vector has indicated an interest in buying the whole company, and Corel's board is willing to sell, but as is usually the case, the two sides are swing-dancing to reach a fair price. Vector says it might be willing to pay $1.10 a share, but first it wants to take a good look under the hood. If all checks out, Vector will make a formal offer within 30 days.

The understanding between the parties is termed a "non-disclosure and standstill" agreement. That sounds like the irate teacher in grade school who would yell, "Shut up and sit down!" Actually, it means that Vector will keep any information it gleans about Corel's inner workings confidential.

Standstill provisions limit the conditions under which Vector can buy the company and may also put some constraints on Corel from running off and selling to someone else. Investors who want the full lowdown on these stipulations will have to wait until a copy is filed with regulators, probably in early April. So far, the market is taking a sceptical view that any kind of deal will be struck, Corel is trading at $1.32 on the Toronto Stock Exchange and 92 cents (U.S.) on the Nasdaq.

As publicized so far, the preliminary agreement has some interesting wrinkles. Vector is not allowed to make a low-ball offer — one dollar is the minimum bid. Corel is free — perhaps even encouraged — to drum up other interest. Vector will hand over their shares to another suitor as long as they get at least $1.25 a share. That would yield a lovely return on their buy at 56 cents. These Vector guys are pretty sharp.

But $1.25 would still be a bargain for a larger firm that wanted to add Corel's products to their mix. A merger with Borland Software fell apart a few years ago, and rumours of a buyout by Adobe Systems have surfaced from time to time. Another outfit that would make an interesting match with Corel is privately held Quark Inc., creator of the page-layout program QuarkXPress.

For our part, if Vector is successful at even a buck, that converts to about $1.48 CDN, a 22 percent gain from our purchase price of $1.21 last December. That is a far cry from our initial sell target of $4.24, but given the swift timeline, not too shabby. And if a couple of firms can be induced to compete for Corel, then the good times will really get rolling. Uh-oh, those beaks are starting to crack the shells again ... we'd better just hold steady for now.


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