February 14, 2000

In Merging, Corel and Inprise Aim for a Software Niche

By LAWRENCE M. FISHER

an two losers from the Windows world marry and find happiness -- or at least better sales -- in the Linux world? It may seem like a long shot, but that is the bet Corel Corp. appears to have made in announcing last week that it will merge with Inprise/Borland Corp.

Corel's primary product is WordPerfect Office, a suite of productivity applications, including word processing, spreadsheet and database, that runs a very distant second in the market to Microsoft Office. Corel actually acquired most of the parts of its suite from Novell Inc., which had bought some of them from Borland before Borland withdrew from the Windows application market to concentrate on software development tools under the Inprise name.

	Adrian Wyld for The New York Times
	Michael C. Cowpland, president of Corel, with Gavriel State, a programmer. Corel released a Linux system last year and plans a WordPerfect Suite for Linux.

Though there remains a loyal core of WordPerfect users, primarily in law offices and corporations, and though many programmers still use Borland products to create new software, neither Corel nor Inprise has managed to achieve profitable growth for some time.

But last year's introduction of Corel Linux added a bit of luster to the company's image, and a few points to its share price, allowing it to use those shares for its planned acquisition of Inprise in a stock swap valued at $1.07 billion, or about $14.94 a share.

Shares of Corel, which is based in Ottawa, closed on Friday at $17.50 in Nasdaq trading, after dropping as low as $2 the last 52 weeks. Inprise, based in Scotts Valley, Calif., closed at $11.5625. When it was known as Borland, the company once traded in the mid-'80s.

Linux is the popular free variant of the Unix operating system developed by the Finnish programmer Linus Torvalds. Widely praised as a lower-cost and more reliable alternative to Microsoft's Windows NT, Linux has made surprising gains in the market for the powerful computers that are used as network servers. It has been particularly successful among owners of Web servers based on the Intel Corp.'s Pentium chips. And although it is available free, a couple of dozen companies have sprung up to sell enhanced versions of Linux packaged with other software and services.

But Corel Linux differs from the products offered by companies like Red Hat or VA Linux Systems in that Corel's Linux is aimed not at servers but at desktop computers, a market in which Microsoft holds a monopoly with Windows 95 and 98.

Indeed, Corel recommends that users who need an operating system for their network servers install Red Hat's product, though a server version of Corel Linux is in the works. Corel has also released a Linux version of its WordPerfect word processor, and it is promising a suite of desktop Linux applications by April.

This is a market that is wide open. The only existing productivity suite for Linux is Star Office, a set of applications distributed free by Sun Microsystems that has not gained wide corporate acceptance. Sun has not indicated a timetable for releasing improved versions of the suite.

And at least for the foreseeable future, Microsoft is not expected to develop a Linux version of its industry-leading Office suite, because that could help legitimize Linux and discourage wider adoption of Windows 2000.

The logic behind Corel's acquiring Inprise is straightforward. Inprise gives Corel a full range of software products, including programming languages and software development tools, an operating system and desktop applications. The only other company that can claim all three categories is Microsoft, and though the combined 1999 sales of Corel and Inprise, $418 million, are dwarfed by Microsoft, the combination of Corel and Inprise is larger than any Linux company.

"With Inprise/Borland's leadership in the software development community and Corel's Linux desktop operating system and productivity applications, we have an extraordinary opportunity to reach all facets of the exploding Linux market," said Michael C. Cowpland, Corel's president. "This merger enables us to offer end-to-end product solutions and global support to all of our shared customers."

But analysts question the size of the opportunity. Linux has had phenomenal growth, but from a tiny base, and total 1999 Linux sales for all companies came to just $63 million, a tiny fraction of total operating system sales, according to the International Data Corp. Virtually all of that was at the server level, and it is not clear whether there is any compelling reason to run Linux on the desktop. No major manufacturer offers Intel-based desktop machines without Windows already installed, and the purported advantages of Linux, like freedom from crashes, are less critical on desktops.

"There's not exactly an immense market for Linux desktop applications," said Jeffrey Tarter, editor of Softletter, an industry newsletter. "No. 2 has to find places where No. 1 is vulnerable, and certainly Microsoft is never going to develop credible applications for Linux. This is a place where Corel can go and not have competition from Microsoft."

He added: "Whatever size that market is, I'm sure Corel is going to get most of it. The interesting question is whether Corel can make any money on these fringe markets."

Another issue is whether Corel can maintain credibility among proponents of "open source," the development strategy by which the source code of a program is made freely available to the public, enabling any programmer to offer enhancements or fixes. Linux was developed under this philosophy by unpaid programmers around the world.

Corel antagonized open source proponents last year when it required the signing of nondisclosure agreements to view the beta versions of Corel Linux. Corel said it did not want unfinished code to hurt its reputation or to be copied and distributed by others, and it later amended the text of the agreement.

But Corel cannot really afford to commit fully to the open source philosophy, because almost all its current revenue derives from the products it makes for Windows users.

"Most of the business, almost in its entirety, comes from Windows," said Maureen O'Gara, editor of Client/Server News, a trade publication. "They've got to keep the Windows people calm while they go off and build this new empire."

And she said that although Corel is dwarfed by Microsoft, it has also been "a bit of a comeback kid" in the Windows world.

"It wasn't all that long ago it was trading at a dollar," she said.

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• Corel Corp.

• Inprise/Borland Corp.