Overdrive, page 17
The two companies learned plenty in mid-1993, when they worked out the licensing deal for Borland Office. But the product failed to gain market share against Microsoft Office. “Gates wanted this business so badly that he was willing to give it [Microsoft Office] away for a while,” said Kahn. “Because of his position in operating systems, he had no problems doing that because Microsoft was making so much money. Bill was buying share and kicking everybody else from the market.”
Borland Office was not making money for either Borland or WordPerfect. A few weeks before the conference in Japan, Thompson and Rietveld had flown to Kahn’s home in Scotts Valley, California, to again discuss a possible merger. But Kahn remained cool to the idea. He was, however, interested in selling Quattro Pro, and that's what he told Thompson when they met in Tokyo.
Not long after the conference in Japan, Kahn and Rietveld talked by phone, and the just-named WordPerfect CEO said he was about to fly to Boston and New York on a press tour. Rietveld didn’t say that he planned to meet with Jim Manzi of Lotus while he was in Boston.
Kahn’s relationship with Manzi was even more strained than his relationship with Gates. At least Kahn respected Gates; he didn’t like the way Gates did business, but he respected him. Kahn had no such respect for Manzi. In 1990, Lotus had filed a copyright infringement suit in federal court against Borland over a feature in Quattro Pro that had the same command system as that in Lotus 1-2-3. At the time, Borland was rapidly gaining market share against Lotus. When a federal judge ruled in favor of Lotus, Borland had to take Quattro Pro off the market quickly to remove the offending feature. (In early 1994, the case was appealed to the U.S. Supreme Court, where Borland would win.) The lawsuit proved to be a crippling financial blow to Borland, and Kahn had never forgiven Manzi, who had pressed the case in the face of widespread industry opposition.
In mid-January, not long after Rietveld told Kahn about his pending trip to the East Coast, Kahn was flying home from his own trip to Boston, where he had met with some Borland customers. On the plane seated next to Kahn was a Lotus vice president whom Kahn knew. During the flight, the Lotus executive had several drinks, according to Kahn, and started talking about WordPerfect. Kahn, who does not drink, just listened, the hairs on the back of his neck standing up as the VP from Lotus hinted that Lotus and WordPerfect were talking.
“In that six-hour flight, he must have told me twenty times how great it would be if Lotus could have WordPerfect,” Kahn said. “So I started thinking what I would do if I were Lotus. I would try and break the Borland-WordPerfect alliance, because the combination of bolus ami WordPerfect would certainly guarantee SmartSuite market share. . . . And if such a thing happened, it would be a real bad day for Borland.”
Back at Borland, Kahn reflected on what he had heard. “I wondered if it could be true,” said Kahn. “I really didn’t think the WordPerfect guys would do that to us.” Nevertheless, Kahn decided to phone Ray Noorda. “I knew Ray hated those guys at Lotus,” said Kahn. “So I told him, ‘There’s something fishy going on here. We talk to the WordPerfect guys all the time, and they’re our friends, or they seem to be. Yet I got the impression from this guy from Lotus that there might be some discussions with WordPerfect. I know you are close to Alan Ashton, so why don’t you check it out?’ I knew Ray would be worried, because if WordPerfect merged with Lotus, while it would be bad news for Borland, it would also be bad for Novell, because it would eventually bring Novell into the Lotus fold.”
When Kahn called, Noorda was not aware that Lotus and WordPerfect had talked. Once Noorda had confirmed Kahn’s fears, he was more eager to make a deal with WordPerfect.
Meanwhile, Thompson and Rietveld had arranged a dinner meeting with Kahn at the Sundance Resort restaurant in the mountains outside of Provo on January 26. Kahn came with Bill Jordan, Borland’s director of business development. “It’s kind of a cultural oasis in Utah,” Kahn said of the restaurant, where stills from Robert Redford movies like Butch Cassidy and the Sundance Kid decorate the walls. “We could have been having dinner at Spago’s in west Hollywood.”
Over dinner, Thompson and Rietveld asked Kahn what price he had in mind for Quattro Pro. Kahn told them $400 million. “I said it with a straight face,” Kahn said, “and they dropped their spoons in their soup and got splashed. Bill Jordan was having a hard time containing himself.”
Kahn then explained why $400 million was a bargain, that acquiring Quattro Pro would allow WordPerfect to become a prime player in suites. “They just looked at me,” recalled Kahn.
“These are two very smart people, but they did not seem to have much business experience. They didn’t understand that the $400 million was my asking price. They didn’t understand I was expecting a bid from them. Instead, they just freaked out. Frankly, Bill and I were expecting people who had a little more business savvy.”
After dinner, Kahn and Jordan spent the night in a cabin owned by Ashton, a smaller version of the one where Novell and WordPerfect executives would gather on March 16. Television security cameras canvassed the outside of the cabin. When Kahn picked up the phone and dialed the operator, he was connected with WordPerfect security. Rather than talk business in the cabin, he and Jordan decided to go for a night stroll in the woods. “Bill and I were very concerned that these gentlemen from WordPerfect did not have the business experience to know that we might have to negotiate,” said Kahn. During their walk in the woods, Kahn and Jordan decided that Borland’s financial adviser, Michael Price, of the investment bank Lazard Freres, should get involved as soon as possible. The meeting with Price took place in New York City on February 17. Borland and WordPerfect agreed to begin due diligence and in-depth negotiations.
On Friday, March 11, a team of executives and lawyers from Novell and WordPerfect arrived at Borland’s headquarters in Scotts Valley to begin the first of several weekends of marathon negotiations. Noorda had called Kahn to arrange the meeting. He claimed that Novell was helping WordPerfect financially, but he did not mention that Novell and WordPerfect were talking merger—which would have given Kahn a much better bargaining position. Nor did he tell Kahn that Lotus was making a play for WordPerfect. Kahn assumed that what he had heard on the airplane wasn’t true.
Noorda would later tell writer Wendy Goldman Rohm for an article in Upside magazine that Kahn was desperate for Novell to buy Borland. Noorda told her that a couple of years earlier, Kahn had even shown up uninvited at a Novell staff meeting to try to talk to Noorda about a merger. The article quoted Noorda as saying that he had physically escorted Kahn to the parking lot and told him he would punch him out unless he left. To which Kahn had replied: “Why don’t you like me? You’re like my father.”
Kahn insists it never happened that way. He admits that he and Noorda indeed talked about a merger once. He also says that Noorda invited him to a Novell staff meeting and that when Kahn later told Noorda that he was not impressed with what he saw, Noorda started screaming at him. “I said, ‘Ray, don’t scream and shout. You’re making me think of my father.’ ”
There was no shouting between Kahn and Noorda at the March 11 meeting, but the discussions were heated. When the meeting adjourned, on the table was a proposal by Borland to sell Quattro Pro to WordPerfect for $135 million, which included a license for WordPerfect to manufacture a million copies of Borland’s Paradox database. In addition, Novell and WordPerfect would assume the first $60 million in potential liability if Borland should be unsuccessful in its appeal of the Lotus lawsuit.
The meeting continued the next day, March 12, in the offices of a Palo Alto law firm that was representing WordPerfect. Additional talks were held oh Sunday, March 13. By the end of the weekend, however, the parties remained far apart. Two days later, on March 15, Jim Manzi and a delegation from Lotus flew to Salt Lake City to make a presentation on why WordPerfect and Lotus would make a good team. After the meeting, which was held in the Joseph Smith Conference Center, Manzi was told that WordPerfect would not make any decision until after the next day’s meeting with Novell.
All aspects of the proposed merger between WordPerfect and Novell were discussed at the March 16 meeting at Ashton’s cabin. Novell was offering $1.4 billion. Late in the afternoon, after the Novell team left, the executives from WordPerfect, including Bastian, Rietveld, and Thompson, took a secret vote on the Novell merger. It was unanimous: the company would be sold to Novell, not to Lotus. WordPerfect and Novell shared Mormon culture; more important, however, was the fact that Novell had the networking infrastructure that WordPerfect wanted. Lotus did not. Also, Novell had always made it clear that it did not know much about the applications business, and the WordPerfect executives were convinced they would be left alone to go about their business.
Novell and WordPerfect wanted to make the announcement of the merger after the stock market closed on Monday, March 21. Before then, the deal with Borland for Quattro Pro would have to be completed. By now, Kahn knew about the merger with Novell. He also knew that Lotus had been negotiating to buy WordPerfect. Until the last minutes, Kahn was worried that WordPerfect would go with Lotus. The terms of the deal with Borland were not finalized until Sunday, the day before the merger was to be revealed publicly. Borland agreed to sell Quattro Pro to Novell for $145 million, including the license for Paradox. Further, Novell would not be held liable should Borland lose its appeal of the Lotus lawsuit.
Novell ended up paying much more for Quattro Pro than it was really worth. Internally, the company had put a $70 million value on its spreadsheet business.
After the merger became official, Borland’s legal counsel, Peter Astiz of Baker & McKenzie in Palo Alto, sent a confidential e-mail to Kahn, Jordan, and several other top officers of the company, admonishing them not to gloat publicly over the deal: “I want to congratulate you all on negotiating the company through this period. In the scheme of things, the ability to survive the potential catastrophic cash crunch and get as good a deal as I think was negotiated on QP [Quattro Pro] was a major accomplishment. . . . However, for the time being, I think it best to keep nny congratulations to ourselves. Any attempt to categorize the QPro deal other than as good for both sides would pose significant threats to our relationship with Novell...
The merger made Novell the undisputed number two company in the software industry. But even with WordPerfect’s revenues figured in, Novell still trailed Microsoft by about 2 to 1: $2 billion to $4 billion. Lotus was a distant third, with annual revenues of about $1 billion. Borland had all but disappeared.
In the days after the merger was publicly announced on March 21, Novell’s stock fell 16 percent. Wall Street questioned the wisdom of deal, as well as the amount. Most computer industry experts said that Novell had made a serious blunder and should have remained focused on its core networking products. An exception was David Coursey, editor of PC Letter, who wrote of the merger: “It’s Microsoft’s worst nightmare. Novell awakes from its slumber, realizes its concept of cooperative competition only goes so far, then gets angry and does something. Well, wake up, Bill, it’s happened.”
In fact, the merger would turn into Novell’s worst nightmare. Months later, it unloaded WordPerfect and Quattro Pro for a small fraction of what it paid.
The most astute and prophetic assessment of the merger at the time came from Microsoft’s Pete Higgins, senior vice president for desktop applications: “Novell has a real challenge,” he told the New York Times. “Mergers are difficult in any industry, but more so in software because you have to combine different code bases, as well as different cultures.”
His boss, Bill Gates, took much the same view. Not only was Gates not worried about this new threat, he believed that Novell had made a huge business mistake, that it had been led down a dead-end road by Raymond Noorda, a road paved by his blind obsession with beating Microsoft at any cost.
Bill Gates was on the other side of the world, in China, the day the merger between Novell and WordPerfect was announced in the United States. He was speaking his mind to reporters at a press conference in Beijing, scolding the Chinese government for preventing the marketplace from dictating software standards. He was being his usual pushy and confrontational self. During his short visit to China, Gates would offend just about everyone, including Communist Party leader Jiang Zemin. He had yet to learn that diplomacy usually works better than confrontation.
Microsoft had opened an office in Beijing in 1992. Although personal computers were as rare in China as American automobiles, Microsoft realized the enormous potential of a software market in a country with more than a billion people. In fact, Gates regarded all of the Far East as a potential gold mine for Microsoft. In the first quarter of 1994, Microsoft’s revenues from its Far East markets were up 65 percent over the previous quarter, compared with a 4 percent increase in revenues from Europe and a 34 percent increase in revenues from the United States.
By the time Gates visited China at the end of March 1994, about 500,000 personal computers had been sold there, and the number was expected to double by the end of the year. But software piracy was a growing problem. Chinese factories were churning out millions of copies of counterfeit software, costing U.S. companies like Microsoft millions in lost revenue. Borland International had withdrawn from the Chinese market because of rampant software piracy. The Clinton administration was pressuring Beijing to stop the piracy and strengthen its protection of intellectual property rights. Shortly before Gates arrived in Beijing, U.S. trade representative Mickey Kantor had announced that China was being put on a priority watchlist and that trade sanctions could follow if the government did not crack down on the counterfeiting.
While in China, Cates planned to discuss the piracy issue with Communist Party boss Jiang. He also wanted to talk about Windows and free markets. But he was getting a very chilly reception from Chinese leaders. Microsoft had made many mistakes, both cultural and political.
Its first mistake was not asking for advice from the Chinese government before it opened its office in Beijing. Consequently, its China management team was top-heavy with executives from Taiwan, which China considered a renegade province and not an independent country. But Microsoft’s most serious blunder was in developing P-Win, the Chinese version of Windows 3.0. The software was developed in Taiwan, not in China. Worse, the Chinese version of Windows contained traditional Chinese characters used in Hong Kong and Taiwan, but not in the People’s Republic of China. The characters had been phased out in the 1950s in favor of simplified pictographs to foster national literacy.
Naturally, the Chinese government insisted that P-Win should have been developed with help from the mainland. The country’s powerful Ministry of Electronics Industry, the main body that oversees China’s computer industry, had refused to endorse Windows. It announced that it was in the process of drafting standards that would determine which PC operating system was best for China.
The ministry was concerned that if it officially endorsed Windows, Microsoft would quickly get a stranglehold on the software market in China, as it had done in the United States. By the end of February, a month before Gates’s visit, only 3,000 copies of P-Win had been sold in China. But more than 10,000 copies had been sold of a rival operating system called Chinese Star, which was developed in China and allowed computer users to convert Chinese characters into English.
It was not just the Chinese government that was worried about Microsoft. Some of the comments from Chinese software vendors sounded as if they could have been made by ,Microsoft’s rivals in the United States. “I think we have good reasons to fear that Microsoft will monopolize the market,” one Chinese software vendor told Newsweek. And the editor of a Chinese computer magazine told Reuter’s news service, “It’s clear that Microsoft is pursuing a monopoly strategy in China.”
At his press conference a day before his scheduled meeting with Jiang Zemin, Gates sounded as if he was lecturing members of the U.S. government’s Federal Trade Commission on capitalism. He said the Ministry of Electronics Industry was tampering with the free market by trying to set the standards rather than letting the market dictate those standards. If the government left things alone, Gates said, the market would surely embrace Windows. Continued interference from the Chinese government, said Gates, would only hinder the development of that country’s emerging software industry. “There is no government ministry that has to get involved in every new software that comes into the marketplace,” said Gates, who predicted that P-Win would prevail even without an official endorsement from the Chinese government.
Gates did, however, acknowledge to reporters that it had been a mistake to develop P-Win in Taiwan. “We took the approach that brought it to market most rapidly, for the benefit of computer users,” Gates said. That explanation might have played well in Seattle or Chicago or New York or Los Angeles, but it did not play well in Beijing. Gates continued on his collision course with the Chinese the next day during his meeting with Jiang Zemin, then one of China’s most influential leaders and now, after Deng Xiaoping’s death, the most powerful. Zemin told Gates that he needed to spend more time in China. “Learn something from 5,000 years of Chinese history,” the Communist Party chief told the king of software. (The message was not lost on Gates, who would return to China 18 months later with his wife, his father, and Warren Buffett for an extended visit that included a train trip across the country.)
In the aftermath of Gates's disastrous March trip, the Ministry of Electronics Industry threatened to ban Windows. China Daily, the government’s English-language newspaper, even reported that Windows had been banned. Although the story was inaccurate, it highlighted the seriousness of the problem Microsoft faced.
