Graphics and publishing software maker Corel Corp. said on Monday, 14th April, that it has hired a financial adviser to review the unsolicited buyout bid made by its majority shareholder, private equity firm Vector Capital Corp., on 28th March. This move by Vector is just the latest chapter in a corporate saga that started way back in March 2003 when the private equity firm acquired a 20 per cent stake in Corel from Microsoft.
Since then, the company's shareholding has seen a lot of transfers and transitions, starting with Vector's successful takeover of the company subsequent to its acquiring a minority 20 per cent stake. An Ontario judge approved Vector's takeover bid on 22nd August 2003 after the San Francisco private equity firm offered $1.05 a share, or $97.6 million, for the 80 per cent of Corel common stock that it didn't already own.
After taking the company public in 2003, Vector sold 31 per cent of the company in a public offering three years later. On 2nd May 2006, the Corel IPO raised $69 million at $16 a share. The company's shares have never returned to that level and closed as low as $7.32 on 1st February 2008. At the end of February, the company had about 25.45 million shares outstanding, so Vector's offer values the company's equity at about $280 million.
The $11 per share offer, made late last month through Vector affiliate Corel Holdings LP, is 6.9 times Corel's forecasted $1.60 non-GAAP earnings per share, and considered to be extremely low by analysts, considering that no other profitable software company has been sold for single digit multiple forward earnings ever.
Jeffrey Jacobowitz, an analyst at Robotti and Co. who also owns Corel shares in a partnership he manages, said Vector's offer follows Corel's integration of WinDVD maker InterVideo, acquired in 2006, but comes before the payoff materializes. He added the company's WinDVD player will benefit in the second half of 2008 from Blu-Ray's format war victory over HD-DVD that has made Blu-Ray the standard for high-definition DVD.
He said that the equity firm had listed the company with the intention of selling its remaining stock in a secondary offering after a spike in the share price. Instead, Corel's low share price led Vector Capital's founder and managing partner to declare less than two years ago that the private equity firm had no intention of selling its stake, which today stands at 69 per cent of Corel's outstanding common shares.
"At current values of Corel, Vector is emphatically not a seller," Alex Slusky had told Reuters in October 2006. "Today, I certainly think the public market is not fully appreciating the Corel story." Corel shares closed at $12.85 the day before the Reuters piece was published.
The minority shareholders, including Jacobowitz, fail to find a justification for selling out at $11 a share when Vector itself did not want to sell at $12.85. Especially since the company is earning more money now than it was two years ago. Jacobowitz said he thinks Vector is looking at a second opportunity to buy Corel at a low price and flip it in another two years.
Also, Vector's offer represents only a 3 per cent premium to the value of Corel shares on the previous day of trading, when the stock closed at $10.68 – another reason why the minority shareholders are opposed to the sale.
The special committee of Corel's board said it will also evaluate all strategic alternatives to the proposal and has "been advised by Vector that it is interested in working toward completing the transaction it has proposed, but is committed to ensuring a full and fair strategic review process."
Although Vector holds a majority stake in Corel, acquiring the rest of the company could be difficult. Under Canadian law, a majority of the minority shareholders must approve the offer.
In the meantime, Corel has formed a special three-member committee of independent board members to assist it in evaluating and responding to the proposal. Like Vector, Corel has remained tightlipped about the offer, but said it has retained financial adviser Genuity Capital Markets and legal counsel Bennett Jones LLP and Bingham McCutchen LLP to help respond to the proposal.