Microsoft to sever Dorling ties

MATHEW HORSMAN

Media Editor

Microsoft's near-five-year strategic alliance with Dorling Kindersley is to end, with the news yesterday that the US software giant is selling its entire 18 per cent stake in the UK book and CD-Rom publisher.

The shares, worth pounds 60m, will be placed with institutions in the UK and on the Continent later this month. Co-operation between the two had waned in recent years as both moved to develop their own electronic publishing titles.

"The relationship at the outset was driven more by commercial than by investment considerations," Peter Kindersley, chairman and chief executive, said. "But with both companies now well established as electronic publishers in their own right, the commercial benefits are not dependent on a continued shareholding."

Gregory Maffei, Microsoft's treasurer who has represented the US company on the DK board, said: "Since Microsoft is primarily a developer of software rather than an investor, and since the value of its shareholding has appreciated considerably since 1991, it has decided to realise its investment."

Microsoft, which paid pounds 8m for a 26 per cent stake prior to the flotation of DK in 1992, will realise a capital gain of about pounds 50m. Shares have risen sharply recently, spurred by growing profits and by periodic rumours that a buyer - Microsoft perhaps- might make a full bid. The speculation was fuelled by Bill Gates, Microsoft founder and chief executive, earlier this year, when he confirmed a willingness to invest in Turner Entertainment, the US film and TV giant since sold to Time Warner. Many in the industry expected further deals and viewed DK as a logical target.

Initially, the link with Microsoft led to jointly developed titles such as Musical Instruments and a licensing arrangement, which will remain in place. DK also intends to develop products for Microsoft Network, including so-called "hybrids" that combine on-line services with CD-Rom formats.

Over the past two years, DK, originally a publisher of lavishly illustrated books, has diversified independently into the CD-Rom market, concentrating on children's and educational titles, including the best-selling The Way Things Work. Four new titles are being shipped to retail outlets, including Anne Hooper's Ultimate Sex Guide.

The multimedia side accounts for almost 9 per cent of turnover, which last year rose to pounds 138.8m. The CD-Rom market is expected to grow radically in the UK and in continental Europe. The company said revenues in the first quarter would be in line with expectations, and ahead of last year.

Analysts said yesterday that Microsoft's departure would not affect the company's performance. "Initially, the Microsoft link provided the technical back-up," Neil Blackley, media analyst at Goldman Sachs, said. "But DK decided it wanted to be the Rolls-Royce of multimedia, and wants to use its reputation for quality and earn the higher margins of the new media. It was a high-risk strategy, but it has paid off."

Analysts also shrugged off the dip in DK's share price yesterday, noting that a large share sale would tend to produce downward pressure. After trading as low as 476p, down 60p, the shares recovered to close at 510p, 26p down on the day.