Borland changes course, will spin off tools group

Instead of selling its tools unit as had been planned, Borland Software will spin off its Developer Tools Group into a wholly owned subsidiary, called CodeGear, the company said on Tuesday afternoon.

CodeGear will be responsible for advancing the four product lines formerly associated with the company's IDE business: Developer Studio, including Delphi, C++ Builder and C#Builder; JBuilder, including the upcoming Eclipse-based "Peloton" offering; Turbo and Interbase.

The planned selling of the tools group was announced in February. This move was made after the commoditization of IDEs, which was spawned by the open source Eclipse platform, had eroded the commercial IDE marketplace. Since then, Borland had spoken of the sale progressing and had set a September target date for the conclusion of the sale, but September came and went. 

Borland did not get any offers it could not refuse.

"We've had a lot of interest in this asset from potential investors," said Tod Nielsen, Borland president and CEO. "We felt the offers we received did not correctly reflect the value of this product line," he said during a conference call on Tuesday afternoon. 

Exact revenues for the tools group were difficult to calculate because it was tough to break them out in deals that involved products from multiple product lines, according to Rick Jackson, chief marketing officer at Borland. This calculation complicated efforts to sell the group. Borland had five "serious" suitors for the tools unit, Jackson said.

"After much consideration, we made the decision to establish CodeGear as a separate subsidiary," Nielsen said in a prepared statement released by the company. "We have always stated our intention to find the right buyer for this business -- one who was committed to our developer community, who would continue innovation in our products, and who would offer a sum that matched the value of the business. After a lengthy due diligence process with several serious bidders, we feel the CodeGear decision is in the best interests of our customers, shareholders and employees."

"We believe by creating two separate operations, Borland and CodeGear can both obtain the necessary focus and dedicated resources to serve two important but distinct markets," Nielsen said. "We will continue to partner and share a mutual view of customer success. However, going forward Borland will be completely focused on leading the ALM (application lifecycle management) market, while CodeGear will be focused on the software developer."

CodeGear will be led by Ben Smith, who was appointed Tuesday as chief executive officer. Smith has been working with the tools group for the past 12 months. The spinoff is expected to be completed by early 2007.

Borland's taking the spinoff route may not be the best option, said analyst Theresa Lanowitz, founder and CEO of Voke. The time for spinoffs was a few years ago, she said. The market would have been better served by having the code for the tools offered via an open source format or by having an Indian offshore company pick up the tools, Lanowitz said.

"Borland has made some tremendous development tools," Lanowitz, a former Borland product manager for the C++ and JBuilder tools in the mid-1990s, added. But the time for creating interesting, independent IDEs "has passed us," she said.

Overall, Borland for the quarter ending in September had $82.4 million in revenues, a 21 percent increase over the same quarter a year ago. The company still lost money, however, with a non-gap loss of 6 cents per share. The non-gap figure leaves out certain expenses such as stock options.

But ALM license revenues increased 115 percent over the same quarter in 2005. ALM revenues now account for more than 60 percent over the company's revenues, Jackson said. ALM had accounted for less than one-third of revenues two years ago, he said.

This growth reinforces the company's business strategy, Jackson said.

Borland anticipates returning to profitability in 2007. Borland was last profitable in the first quarter of 2005.