Responding to speculation that Microforum will acquire high-end computer game developer Gray Matter, Microforum president and ceo Rick Winston says discussions are proceeding with due diligence that would effectively see Gray Matter become the internal development arm of Microforum.

Microforum, which bills itself as a provider of interactive software/multimedia services, art and design, animation/cgi services, audio/video post-production, Internet services, and duplication and packaging, has been in the multimedia business since 1985. The publicly traded company began offering shares in 1996, making an initial public offering of one million common shares from treasury, at $6.50 a share, for gross proceeds of $6.5 million.

Gray Matter is Canada’s highest profile high-end game developer, producing titles such as scar for Microsoft, F’es Of Ali for Electronic Arts on the 3DO platform, and NHL All-Star Hockey for Sega Saturn.

The company, headed by Chris Gray, is privately owned. Gray Matter has over 70 employees including art director David Duncan, Nick Gray, director of visual effects, and Rob Anderson and Dave Bright who are both producers. It currently has a profit-sharing program where all employees share 10% of the profits derived from royalties. Staff who work on specific games split an additional 10% of the royalties for those titles, prorated by salary.

At the merger’s root is Gray Matter’s need to be closer to distribution and Microforum’s desire to take a step up in the quality of development products.

‘They’re like any developer in that sooner or later they get tired of splitting the pie with an affiliate label,’ says Winston. ‘They are proven developers and masters of long-term, big-title project development and management. They’ve also got an intricate working knowledge of the Sony Playstation, one of if not the hottest platforms out there. Those are things that are attractive to us. What we have that they don’t have is distribution.’

Winston reports that as of July 1, Microforum had moved away from all internal development. ‘The truth is that Microforum has had a history of developing b-rated and/or budget projects,’ he says. ‘This gives us a chance to step up into aaa frontline products.’

Also factoring in the deal is the tough economic reality that Microforum and all software companies have had to face in the obstinate cd-rom market. Winston, who has been in charge at Microforum since April, says, ‘The truth of the matter is that it’s very very difficult to come up with a financial hit in the cd-rom market.’

An official announcement of the acquisition is expected within the next two weeks.