Canada has been losing technology companies at a dizzying pace of late, with Gennum Corp. and RuggedCom succumbing recently to takeover bids. Veteran technology executive Adam Chowaniec, who once ran Tundra Semiconductor (another company that was sold), believes there are things Canada can do to stop the bleeding. In this Streetwise guest post, he lays out his views.
Although entrepreneurship is alive and well in Canada, and we create a lot of new technology start-ups, we do not get many of these companies to a size that has the potential to impact the economy in a major way. Even for companies that have managed to grow sufficiently to become publically traded in Canada, they are too often lost to acquisition.
So why do we lose so many companies either because they fail or get acquired? I think there are three reasons.
First, we are more risk averse and with a smaller pool of risk capital than other countries and so finance our companies more poorly than their competitors are financed.
Second, we have less experience and weaker business skills as the pool of successful companies is small on a global basis.
And third, because of these two factors, we lose too many promising companies to acquisition at too early a stage of their evolution.
We need companies to grow up to build the critical mass behind the tech sector -- critical mass that then enhances the ability of more start-ups to prosper.
This is particularly troubling for companies that do manage to grow their way to public company status. These are the future ‘anchors’ of the critical mass in major technology clusters in Canada. Think of what Nortel Networks Corp did for Ottawa or Research In Motion Ltd. for Waterloo.
I believe we are now losing these prospective anchors at a faster rate than we can create them. In just the past 12 months, we have seen the acquisition of Mosaid, Zarlink, Dalsa, March and Bridgewater. Now Gennum and Ruggedcom are in play. Before that we saw names like Cognos, Tundra, ATI, Newbridge, and many more disappear.
So why should we care? Some acquisitions are the right step for some companies. We should care because these public companies are the training grounds for that much needed experienced business talent we are lacking. Most business functions after an acquisition are centralised back to the acquirer, leaving an ‘R&D branch plant’ that does not develop business talent. We should care because public companies are big enough to create local infrastructure, buy services and hire and train especially non-technical talent that helps entrepreneurial players grow up.
Most importantly, we should care because going public is almost the only route to securing risk capital for the quantum jump companies have to make in their evolution to economic prominence. We have no developed private equity capital in the technology sector in Canada. As the number of public tech companies diminishes, there are fewer analysts covering the tech sector, fewer investment bankers with sector knowledge, less institutional (investor) knowledge, and therefore less risk capacity.
As a consequence, it’s a much harder path to taking companies public. Less risk capacity means poorer valuations for the remaining public companies which of course makes them more vulnerable to acquisition. And hence the spiral goes on.
So our companies are more vulnerable than say our U.S. peers because of a lower risk appetite in Canada, and therefore poorer valuations. We need to have a debate as to how we can change this risk culture. Especially because our public companies are also east targets for acquirers because our securities legislation gives them much less protection than their U.S. peers.
If you are faced with an acquisition as a U.S. company, the board and the management team can effectively say no. In Canada, if a company is ‘put in play’ you cannot say no, and the company will be sold. It’s only a question of negotiating for the best price. This is simplistic, and U.S. companies can be forced to sell but it is a longer and more onerous process. A modification of our rules along the same principles in Canada would return some of the decision making back to companies’ managements and boards, without taking the final word away from investors.
This would help avoid opportunistic approaches that take advantage of weaker valuations or volatility in a company’s performance. The tools to do this are in modifying our legislation as it applies to shareholder rights plans.
A shareholder rights plan - or ‘poison pill’ as it is sometimes referred to - is a mechanism by which a company can be given the authority to issue new shares in such a way as to dilute the ability of a hostile bidder to acquire the company. In Canada, this is put in place at the time of an impending bid. It is finite in time (usually 60 days) and can be appealed to the Ontario Securities Commission (OSC) so can be significantly less than 60 days (often referred to as an application to cease trade the plan).
In effect it gives the company a very limited amount of time to find an alternative to the bidder at hopefully a better price, but will not stop the transaction and is not sufficient time to delineate all the possible alternatives.
The U.S. version of a rights plan can be voted in anytime, usually at an Annual General Meeting, and does not have a fixed end point. It supports the concept that the fiduciary duty of the directors and management is to act in the best interest of the company and all its stakeholders, not just the shareholders who are extant at that time. These ground rules make this a longer and more onerous process to make a bid, and highlight the need for a strategic rationale in moving ahead rather than just an opportunistic financial sortie. We should be lobbying the Ontario Securities Commission to do exactly this and swing the pendulum towards the US model.
Technology companies by their nature are volatile, especially public companies. Shifts in technology or markets or competition can at times blindside even the best management teams. Having the risk appetite and the legislative framework to weather these storms is crucial to the long term success of the technology sector in Canada.
Pick any very successful tech company and you will find that at some time it faced acquisition. But for those that survived as standalone companies, many contributed hugely to the economy in subsequent years. Apple is a case in point. It survived several trying times in its evolution but exists to be the star it is today.
Now is the time to take action. Our corporate leadership must learn to work outside the comfort zone that holds Canadian companies back versus foreign competition. Without growing more Canadian tech companies and expanding our tech clusters effectively, Canada faces an increasing challenge in maintaining it’s economic clout in the tech space. A space that is every global players focus.
Adam Chowaniec has over 30 years experience in the technology sector and has invested in and chaired numerous public and private corporations. He is currently Chair of BelAir Networks, Director of Solantro Semiconductor, holds a Privy Council appointment as a Director of Export Development Canada, and serves on the Private Sector Advisory Board of the Natural Sciences and Engineering Research Council.