Tales of the unexpected: Microsoft invests in Corel

Whether the latest deal - which sees Microsoft buy $135m worth of non-voting shares in Corel - is good news for Corel isn't in doubt. Until now the Canadian company has looked like either a candidate for acquisition or bankruptcy. Now its shares have soared, but many questions remain unanswered.

Derek Burney, CEO of Corel, told silicon.com Microsoft wants Corel to be part of the .NET movement, and recognised that the firm is a solid investment.

He said: "Microsoft has been proved right because it has made its money back on day one with the rise in our share price. This deal has proved to the outside world that Corel is in good shape."

Both Corel and Microsoft deny Microsoft will exert any control over Corel, and furthermore deny there are any potential competition issues.

In their traditional businesses Corel and Microsoft are direct rivals. Corel's suite of productivity applications is one of the few rivals to Microsoft's, and it also sells a version of the Linux operating system, increasingly a rival to Windows.

Martin Rees, partner at law firm DLA, says because of this the deal will undoubtedly attract the attention of the competition regulators. "Inevitably there will be regulatory eyebrows raised, and those regulators will want a detailed explanation of exactly what Microsoft is doing," he said.

This is notwithstanding the fact that Microsoft has bought non-voting shares, with no board presence. Rees maintains that whether Microsoft has an official voice or not, the fact that it owns a quarter of Corel means it must have influence over it.

Which all makes the deal stranger still. Why would Microsoft, at an extremely delicate stage in its battle against the DoJ in the US, want to rock the boat by behaving in a monopolistic fashion?

The reality could be even more bizarre. Some are suggesting much of the strategy behind the deal is, perversely, to protect Microsoft from the regulator's wrath. By supporting a competitor who would otherwise have gone out of business, Microsoft can still claim to be in a competitive market.

Supporters of this somewhat mischievous argument point to Microsoft's previous investment in Apple - then in the depths of its financial woes - as a case in point. Mat Hanrahan, analyst from Bloor Research, said: "This is a corporate deal, and I'm sure there are both technology and corporate strategy reasons behind it. However, there is a lot of mileage in the mischievous."

Whatever the competition issues, the deal is something of a lifesaver for troubled Corel. In response its share price has almost doubled, up to $9.30 from $5.50 at the close on Monday.

It marks the first significant impact of its new CEO Derek Burney. Nigel Brown, European VP of Inprise, the company which until recently was to merge with Corel, said it would be impossible to imagine the deal having gone through under old CEO and long-time Microsoft-baiter Mike Cowpland.

Brown thinks the deal gets Corel out of a financial mess, and also gives Microsoft more options: "This deal is a surprise to everyone. However, it does give Microsoft a way to protect itself against the rise of Linux, and it gives them a multi-platform strategy for .NET, something Microsoft has never had."

He added it is too early to say quite what Microsoft means by its .NET strategy: "Microsoft makes a lot of noise about a lot of initiatives. Some stay, and some disappear very quickly. It still remains to be seen which of these .NET is."

For Microsoft's part it says the deal is a significant investment in its .NET platform. A spokeswoman for the company said it wanted to capitalise on Corel's expertise with ASPs, and with the downloading of software over the internet.

Bloor's Hanrahan added: "Microsoft is pitching .NET as an open, XML-based standard, upon which services can be run over the internet. If that is true, then they have to embrace different platforms. Corel helps them get access to different platforms."

He still doubts Microsoft can deliver on its .NET strategy.

For Corel's part, it is just happy to be involved.

Burney said: "Microsoft recognises the value of our brand, and wants it to be part of the .NET platform. This is a technology deal."

The arguments between tech pundits goes on. Is Microsoft seriously interested in Corel for technology, or is this a more strategic gameplay with competition ramifications? The answer is probably both.

The interesting thing now will be to see what Microsoft does with the considerable expertise and developer resources it will gain, and what happens to Corel's Linux investment. The temptation to try and climb into the driving seat may be too much for Microsoft to resist.