Corel needs leadership, not stock touting shills.
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Corel CEO shills for stock by loving Linux
By R. Scott Raynovich, Editor
Redherring.com
NEW YORK -- There's a common joke circulating around technology investment circles these days that suggests that companies with lagging stock prices should slap "Linux" on their company names.
That's exactly what Michael Cowpland, founder and CEO of Corel (Nasdaq: CORL), has done. And any investor who has one eye on the wallet should be very suspicious of a CEO who follows a strategy that's the butt of water-cooler jokes.
As the high-technology equivalent of a ch-ch-changin' David Bowie, Mr. Cowpland's latest rock-and-roll alter ego is a Linux revolutionary reinventing his second-tier Canadian manufacturer of desktop applications as a Microsoft (Nasdaq: MSFT) slayer.
Speaking on Thursday at Bazaar, a conference focusing on Linux development and technology held as part of the eBusiness expo in New York City, Mr. Cowpland described Corel's new push into the Linux arena. This includes the recent release of Corel Linux OS, a desktop-oriented release of the so-called "Debian" distribution of the open-source OS, as well as Linux versions of the company's Wordperfect Office suite. For effect, he was flanked by grass-roots Linux gurus such as Eric Raymond, author of Cathedral and the Bazaar, a seminal book in the open source movement.
STOCK JOCKEY
Mr. Cowpland's pursuit of instant gratification by capitalizing on the Linux hype is as transparent as the open-source code he purports to worship. For example, at Bazaar, in a display of salesmanship that would have made Securities and Exchange Commission (SEC) Chairman Arthur Levitt shiver in his suit, Mr. Cowpland showed a slide that compared Corel's stock valuation with other Linux companies such as VA Linux Systems (Nasdaq: LNUX) and Red Hat (Nasdaq: RHAT), and implied that because Corel is now a Linux company, it actually deserves the better than 20-to-1 price-to-sales valuations that VA Linux and Red Hat are receiving shortly after their high-powered IPOs. Corel currently trades at a market cap of $1.53 billion and has a price-to-sales ratio in the range of 5-to-1.
CEOs are not supposed to be lecturing at developer conferences about the valuation of their shares. That's the Wall Street equivalent of President Bill Clinton conducting meetings on sexual mores at a meeting of the Federal Reserve Board.
"It's interesting that something open and free has generated one of the largest valuations on Wall Street," said Mr. Cowpland at the conference.
Very interesting, indeed. In addition to offering the Corel version of the open-source OS as a free download, company representatives will also be selling packages of the Linux OS that add utilities and applications. They justify the price ($50 or $70) for the packaged versions of free Linux because they will be adding value -- presenting apps and utilities that make Corel desktop version of Linux look almost exactly like, well, Microsoft Windows. In addition, Corel intends to market its Wordperfect line of word processing and spreadsheet applications -- yes, the same Wordperfect that resulted in Novell's (Nasdaq: NOVL) disastrous blow-up years ago -- in Linux versions.
According to Mr. Cowpland, with Red Hat focused on the Linux server market, the desktop market for Linux OSes and applications is Corel's for the taking.
LINUX LINING
The strategy, as blatantly opportunistic as it seems, has indeed interested the day-trader set and put some pop back into Corel stock. Since August, when Corel first started talking to Linux and shares were trading at about $4, shares have surged more than 500 percent, as the monster IPOs and steady gains by VA Linux Systems and Red Hat have boosted the public's enthusiasm for anything related to the open-source OS. On Friday, Corel rose $0.88 to close at $24.75.
The bottom line, however, is that unlike either VA Linux and Red Hat, which have short track records and are developing companies with tiny revenues and impeccably timed IPOs, Corel is a company that's been around for 15 years and has struggled to find new markets for growth beyond its core line of Corel Draw graphics products. Even the most optimistic forecasts for sales of Linux-based OSes and Wordperfect Office suite products aren't likely to fuel a growth rate that would justify a valuation in the league with VA Linux Systems or Red Hat, which, after all, may just be riding speculative bubbles of their own. The fact is that after 15 years, Corel has never come close to threatening the $1 billion mark in sales.
The current scenario is reminiscent of Mr. Cowpland's last alter ego experiment, in which he hijacked the buzzwords of the mid-1990s, "Java" and "thin client," in an attempt to market Wordperfect, the office suite he bought from Novell in 1996, as a Java-based product for server-based computing. The company pulled the plug on the project after it shot a hole in Corel's balance sheet: sales grew from $164.31 million in 1994 to $334.24 million in 1996, only to recede to $246.83 million in 1998 after implementing the Wordperfect acquisition and Java plans. Net income went from $32 million in 1994 to a net loss of $30.45 million in 1998.
At least one financial analyst who covers Corel sees the Linux ploy as specious, at best. Michel DeLavergne, an analyst with BLC Securities in Montreal, doesn't see the Linux strategy contributing to either top-line or bottom-line growth for the company, at least in the short term.
"It's a hypefest, big time," says Mr. DeLavergne. "He's playing that Linux card to position himself with the Linux stocks. I'm not anticipating any growth from Corel over the next few months."
What about that Linux valuation? Well, based on Corel's recent price of $24.81, Mr. DeLavergne believes that Corel is overvalued. He has issued a Reduce recommendation with a target price of $7.
CFO RESIGNS
How optimistic are Corel executives about the strategy? You might want to consult with Michael O'Reilly, the company's executive vice president of finance and chief financial officer, who was largely credited with returning the company to profitability after joining Corel in 1997 as a 21-year veteran with KPMG. Mr. O'Reilly resigned on Wednesday. Before the news of Mr. O'Reilly's resignation, Jim Orban, Corel's executive vice president of sales and marketing, announced on December 7 that he will be leaving the company effective December 31.
In days like these, it probably serves investors best to look at a company's track record before jumping on the investment bandwagon that follows a raft of Linux-related press releases. Corel has struggled during its 15-year existence. Its last strategy shift, a misguided effort to compete with Microsoft applications on alternative platforms with catchy buzzwords, resulted in years of losses and a plummeting stock price. After a return to profitability, the CFO who engineered the recovery has resigned, and the CEO has launched a new strategy that focuses on -- you guessed it -- competing with Microsoft applications on alternative platforms with catchy buzzwords.
To boot, Mr. Cowpland pitches himself as a valuation expert on his company's stock at a developer conference. He is already being investigated on insider trading charges by the Ontario Securities Commission.
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