Corel Hits the Comeback Trail

This tech veteran returns to the IPO market with a leaner and more stable portfolio.
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As software maker

Corel

positions itself toward the future with its anticipated IPO, investors buying into the offering may find themselves looking squarely into the past.

Corel will surely have the richest history of any tech company going public this year: It was founded nearly 31 years ago in Ottawa by Michael Cowpland, a British-born entrepreneur.

Originally called the Cowpland Research Laboratory, the company shortened its name to the one it still bears today and, after a few years of casting about for a successful business model, hit gold with the graphics software program CorelDraw. On the back of that success, Corel went public in 1989.

CorelDraw's success was big enough to spur the company into new areas of software. Notably, Corel bought WordPerfect -- the word-processing software that at the time was giving

Microsoft's

(MSFT) - Get Report

Word a run for its money -- for $185 million in 1996. At the time, Corel was Canada's largest software company, and looked like it had the gumption to take on all U.S. rivals.

Things took a bad turn soon after that. Microsoft start bundling Word with its Windows software, a move that, despite Corel's best efforts, effectively elbowed WordPerfect out of the marketplace. Then Cowpland found himself under investigation for insider trading related to an August 1997 sale of Corel stock. In 2003, he settled with the Ontario Securities Commission and paid a $575,000 fine.

The prolonged investigation helped lead to Cowpland's departure in 2000. Two months later, the new management struck a deal with arch rival Microsoft, which paid $135 million for 24 million convertible shares of Corel in exchange for Corel's support for its .NET platform.

In the late 1990s, Corel returned to its original strategy of casting around for new business models until one caught on. It nearly found success with its Linux desktop software, which won over the growing open-source developer community by opening Windows computers to Linux. The Linux-mania that raged during 2000 pushed Corel's stock to renewed highs.

Only a year later, Corel shuttered its Linux operations and sold its Linux source code to Xandros. But in 2002, just as the open-source movement was starting to build up strong traction, Corel pulled the plug on its open-source development site, choosing instead to focus on its two trusty workhorses, WordPerfect and CorelDraw.

So, after 10 years filled with acquisitions and deals -- including a failed merger with

Borland Software

(BORL)

-- Corel looked a lot like it did in 1996, only with a depressed stock price. That's when buyout firm Vector Capital stepped in, first buying Microsoft's 20% stake, then purchasing the remaining shares for $98 million.

Vector installed partner Amish Mehta, who had been chief executive at CommercialWare before joining the buyout firm, as Corel's CEO. Mehta quickly undertook a dramatic restructuring, selling off underperforming assets, slashing R&D activity and, after focusing the company on core assets, picking up a few other software brand names such as WinZip and JASC Paint Shop at bargain-basement prices.

As a result, the Corel coming back to the public markets is simultaneously leaner and beefier than the company that went into corporate rehab three years ago. Corel's product revenue rose 52% to $148 million in 2005, a nice growth rate -- which was driven, however, largely by picking up WinZip and JASC.

WinZip brought in $19.4 million last year, while other so-called productivity software programs, notably WordPerfect, saw a $1.6 million decline. Similarly, JASC boosted graphics and digital imaging software revenue by 56%, while other products in the group, including CorelDraw, were roughly even.

And that gives a nice snapshot of what investors will be getting when they buy into Corel's IPO: This company is a staunch alliance of battle-scarred survivors of the past two decades of a turbulent and sometimes brutal software industry. None of the survivors alone can promise the kind of surging growth of a new start-up, but together they offer the stability and hard-won wisdom of veterans. And stability will often find a place in many tech portfolios.

The biggest winner of this offering, though, is likely to be not Corel but Vector Capital. Corel plans to sell 5 million shares for $82.9 million, and when the offering closes, it will also tap into a $90 million credit facility. However, $140 million of that won't go toward growing the company but for paying back existing loans, and another $5 million will go toward financing fees and expenses for the new loan.

That leaves $28 million for "general purposes, which may include acquisitions," the prospectus says.

Vector, which owns 98% of Corel before the offering, plans to sell 2.95 million shares, pulling in a tidy $56 million. That's in addition to the undisclosed price Corel will pay to buy WinZip as soon as this IPO closes -- a sum which the prospectus says is "significantly higher" than what Vector paid.

Then there's the $12 million dividend that Vector had WinZip take a loan out to pay, and a $4.1 million distribution Corel paid to Vector in 2003. On top of that, Vector will receive 4.3 million new shares of Corel on completion of the IPO, which will simultaneously consummate Corel's purchase of WinZip from Vector.

All of that sleight of hand is not only highly profitable, it's exactly the kind of dealmaking that keeps buyout firms in business. Institutional investors may not love the dividends WinZip has paid to Vector, but they can appreciate the high profit margins added to Corel's bottom line. In 2004, Corel's operating margin was 7.5%, while WinZip's was a staggering 62.3%.

Corel's and WinZip's financials were rolled together for most of 2005 (Vector took control of WinZip in January 2005), so it's hard to compare with 2004. But it's clear that once WinZip's numbers were added in with Corel's, the combined operating margin was 10.3%. WinZip made up only 14% of Corel's 2005 revenue, but assuming its 62.3% operating margin in 2004 stayed constant in 2005, it also accounted for 84% of Corel's $16.9 million operating profit.

In the end, the nostalgic glow emanating from this IPO may be its greatest asset. This offering is not unlike buying a ticket to go see a concert of a 1980s hair-metal band: You can't expect any shattering new songs, but their tried-and-true golden oldies will carry them along for a while. Consider the pending IPO from Corel its long-awaited reunion tour.