A U.S. company will acquire Toronto’s MGI Software Corp., ending speculation regarding the photo editing software company’s future.

Roxio Inc. of Milpitas, California, the self-titled “Digital Media Company” and recent spin-off of Adaptec announced Tuesday a definitive agreement to acquire all of the outstanding shares of MGI in a stock-for-stock transaction. Approximately 2.3 million Roxio shares will be issued to MGI stockholders. Based on Roxio’s closing price and exhange rate, the deal is valued at $51.7 million.

The transaction is subject to Canadian regulatory approval and MGI shareholders and is expected to close within 90 days. The boards of directors of both firms have unanimously voted in favour of the acquisition. Roxio will also make available a US$1.5 million line of credit until the deal closes if MGI needs funds to continue operations.

Neither company would comment specifically on what restructuring or layoffs might occur as a result of the acquisition.

“We looked at what consumers most want to do: this pointed to digital photography and digital video,” said Chris Gorog, president and CEO of Roxio.

Gorog said digital photography has gone mainstream as digital cameras outsell traditional cameras. In the year 2000, he said, digital cameras accounted for 30 per cent of all cameras sold in the U.S. “The editing and sharing of digital photos continues to grow at dramatic rates. Digital video is just starting to gain momentum with consumers.”

He said the acquisition of MGI is synergistic from both a product portfolio and marketing and distribution standpoint. Roxio expects MGI to contribute about US$25 million in revenues for fiscal 2003. “Our products are highly complementary,” said Gorog. “We distribute our products through the same channel – OEM and retail, and we share many of the same partners.”

He said the acquisition will broaden and strengthen Roxio’s existing OEM partnerships. “Roxio will gain some key new OEM partnerships,” he added.

Once the acquisition is complete, Roxio will sell MGI’s flagship brands. MGI founder and president Anthony DeCristofaro will continue on the with company as a special advisor, concentrating on the consolidation and integration of the companies.

In the past, he said, MGI has focused on topline growth, but recent need for cost-cutting and profitability has limited its room to maneuver. “Earlier this year we recognized that partnering was one of the key avenues to assure the next level for MGI. We believe this transaction with Roxio is best for the near term/long term.”

DeCristofero said both companies share the same digital media vision. “From a customer-base standpoint, there’s also great synergy.”

Kristy Holch, principal analyst with Boston-based InfoTrend Research Group, said it’s hard to predict photo imaging software numbers because a huge amount of sales go through direct channels. “Even retail tracking doesn’t show all of it,” she said, but all evidence is that the market is growing. “It’s definitely tied to sales of products like digital cameras and scanners. Scanners are slowing down but digital cameras are really ramping up.”

MGI, which was founded in 1995, recently struck a two-year US$10 million deal to supply Japan’s Sony Corp. with a version of its VideoWave and PhotoSuite software with all Sony Camcorders and digital cameras.

According to InfoTrends, worldwide shipments of digital cameras are expected to grow from 10 million units this year to 80 million by 2005 and more than 200 million cameras by 2009.

Holch also sees Roxio as one of several key players that will bring digital imaging editing away from the PC to the television. “We see as a big future trend that digital imaging will migrate beyond the PC on to the television. This big wave is still a year or two off.”

DVD player sales are growing, Holch noted, but most of them can’t play DVDs with images on them, yet people can easily create them on their computer. “They’re confined to playing them back on the PC,” she added. “Photography is moving away from being just a PC-centric thing to being a consumer electronics entertainment application.”

MGI is a fairly well known and respected name, said Holch, both on the photo and video side. “MGI is definitely one of three or four players you think of if you think of photo imaging.”

Marc Mombourquette, industry analyst, also with InfoTrend, said Roxio’s core competency is burning CDs, but said both companies have things to offer to the marriage. “It makes sense for the two to merge.”

Roxio had added a whole host of applications to the CD recording market, he said. “When you’re burning a CD, we’re not just talking about raw data. There’s real life applications for it.”

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