Buyout Offer Key for Corel Shares

After approximately a three-year stint as a privately held company, Corel Corporation (CREL - Analyst Report) has emerged as a much stronger and more profitable entity. With the 2007 integration of InterVideo and Ulead complete, CREL is leveraging new products across its sales and distribution network.

Although the stock is inexpensive, acquisitions add a degree of risk and further acquisitions are unlikely, given its low equity valuation and high level of debt. CREL has hired Genuity Capital to advise it on a proposal by Vector Capital to buy its remaining outstanding shares for $11, which we don’t expect it to take. We maintain a Hold rating on the shares with a six-month price target of $11.50.

Corel has several trends working in its favor. The rapid decline in the cost of PCs means increased purchase per household, which should benefit its original equipment manufacturer (OEM) business. The cost of the packaged software is becoming a larger component of the total cost of PC ownership, which could favor lower-cost software. Corel’s second quarter results were in line with the company's guidance.

Corel is pursuing a strategy of acquiring other successful packaged-software companies that it can leverage across its global sales, marketing and distribution platform. All of its acquisitions have been of companies with annual revenue of over $25 million and have had a positive contribution to its EBITDA.

In March, Corel received a buyout bid from Vector Capital’s affiliate Corel Holdings, L.P., which plans to take the company private. The company is currently evaluating Vector Capital’s offer, which will keep the stock price at current levels. Although current market conditions have been challenging, we believe the stock should be fairly stable given its low valuation and modest positive outlook.

Read the full analyst report on CREL