07:12pm EST 7-Feb-00 Merrill Lynch (A.Baluta) (416-369-2055)
Reason for Report: Company Update
COREL: Offers to Buy Inprise for 0.747 a Share
Merrill Lynch Global Securities Research
COREL CORP. (CORL/OTC)
Offers to Buy Inprise for 0.747 a Share
Alex Baluta 416-369-2055
NEUTRAL
Long Term
ACCUMULATE
Investment Highlights:
o Corel offers to buy Inprise/Borland for US$1bn, or 6x sales. Transaction involves exchange of one Inprise/Borland share for 0.747 Corel shares. Would leave Corel shareholders owning 56% of combined company post merger. Deal expected to close in May.
o Deal is not about existing products and markets. We see little synergy between out-of-the-box word processing and graphics solutions with complex back-end custom application development and middleware tools. Both companies are struggling with declining "traditional" product sales.
o Deal is about Linux. But not necessarily about existing products as suggesting synergy in current products suites in a Linux release is just as tenuous.
o Potential upside is in combining and focusing resources of two legitimate Linux contenders. Both companies' applications should experience demand as Linux market matures over coming years. Opportunity exists to continue to
round out Linux product offerings as market is still young.
o We expect Corel will continue to trade as a news-driven Linux play.
Summary
On Monday, February 7, 2000 Corel announced the proposed acquisition of Inprise/Borland (INPR:$13.25; Not Rated). Our initial view on this merger is mixed, but cautiously and curiously optimistic. Inprise/Borland is a software vendor of application development and middleware tools. The company is in a transition mode as its "legacy" products are experiencing declining revenue growth rates. The company has been restructuring product offerings and operations in an effort to kickstart sales growth. We have no comment on the
viability and competitiveness of the Inprise/Borland product lines; however, suggesting that there is a strong synergy between the two companies' traditional product offerings is an Olympic stretch. Corel is focused on office productivity and graphics software, an out-of-the-box, easy-to-use
solution, while Inprise/Borland is focused on application development tools and middleware - complex enterprise software infrastructure tools.
Even when we look at the companies' technologies in the Linux space we see little synergy, as the products solve completely different organizational challenges. But this isn't about old technology or application focus. This is
about Linux momentum. We expect that this merger will ultimately create a stronger Linux player, if only because the companies will be throwing more coordinated resources at the perceived Linux opportunity. The upside is that the combined entity has more momentum, and potential revenue, from the emerging Linux opportunity. We expect that the combined companies should continue to broaden their Linux tools over the near term. For Corel shareholders, Inprise/Borland brings close to US$200mn in cash to the combined companies - a definite positive.
We continue to believe that Corel will trade as a Linux play, and be driven by news and market momentum rather than near-term results.
We note that while Corel is paying almost 6x revenue for a company that has declining sales, it is hard to claim that it is overpaying, given that it is using shares and that they are trading at a valuation of 5.6x of their declining sales.
Recent Developments
Transaction Details. On Monday February 7, 2000, Corel and Inprise/Borland jointly announced the proposed merger of the two companies. Under the terms of the deal, each Inprise/Borland share will be exchanged for 0.747 Corel shares. Corel will issue a total of approximately 53.7mn shares to Borland shareholders. Based on Monday's closing price of US$19 5/16, Corel is paying just over $1bn for Inprise/Borland, or 5.9x trailing sales. Post transaction,
Corel shareholders will own 56% of the combined entity.
Inprise/Borland's Business.
Inprise is the organization that resulted from the combination of Borland and Visigenic in early 1998. Borland is a software tools developer, well known for its language products (C++, Pascal) and as the original developer of Quattro Pro and Paradox, products now offered by Corel. Visigenic is a provider of CORBA (Common Object Request Broker Architecture) solutions, a technology used to bridge applications running on different computers. Post-merger, the company has positioned itself as an enterprise software tools developer with a focus on cross-platform and distributed computing environments.
Outlook
We will adjust our model to include the impact of the Inprise/Borland acquisition closer to the date of the completion of the merger.
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CORL Price: $19 5/16
Estimates (Nov) 1998A 1999A 2000E
Net Income (mn): -30.4 16.7 26.8
EPS: -0.51 0.26 0.38
P/E: NM 74.3x 50.8x
EPS Change (YoY): NM 46.2%
Consensus EPS: (: )
Gross Dividend: Nil Nil Nil
Gross Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-3-2-9
Mkt. Value / Shares Outstanding (mn): $1,371.2 / 71
Book Value/Share (Nov-1999): NM
Price/Book Ratio: NM
Stock Data
52-Week Range: $44 1/2-$2
Symbol / Exchange: CORL / OTC
Bloomberg / Reuters: CORL US / CORL.O
Brokers Covering ():
Exchange Rate: USD1.0000/USD
Free Float: NA
For full investment opinion definitions, see footnotes.
All figures are in U.S. dollars except where otherwise noted.
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