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The Research In Motion Ltd. company logo in front of one of their many buildings, in Waterloo, Ont. (DAVE CHIDLEY/THE CANADIAN PRESS)
The Research In Motion Ltd. company logo in front of one of their many buildings, in Waterloo, Ont. (DAVE CHIDLEY/THE CANADIAN PRESS)

Canada’s vanishing tech sector Add to ...

If Research in Motion Ltd. is no longer Canada’s most valuable publicly-traded high tech company, what is?

The answer may surprise you. You won’t find it in the S&P/TSX information technology index. Except for its stock market listing in Toronto and the fact that it’s registered in the Yukon, it is barely Canadian at all. But in the past few years, SXC Health Solutions Corp. – which uprooted its head office from Milton, Ont., to the Chicago area a decade ago – has mushroomed into a world-beater, on the back of software its sells to firms that manage prescription drug claims for employers and governments mostly in the United States.

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SXC became so successful, it began buying its customers, and now manages many drug benefits programs itself. The stock has increased sixfold in value on the Toronto Stock Exchange in the past three years, giving SXC a stock market valuation of close to $10-billion – more than double the size of RIM.

That may be great news for SXC shareholders, but in a sense, it’s deeply troubling for the Canadian high-tech sector. One of the country’s great homegrown successes has all but shed its Canadian roots (SXC has just 35 employees left in Canada). Meanwhile, the other, RIM, which has been Canada’s top tech name for much of the past decade, is trying to arrest a steep decline. The BlackBerry maker’s rapid reversal of fortune means that, for the first time in at least a generation, Canada lacks a single, healthy large-capitalization tech champion.

In fact, the air is quickly coming out of Canada’s high tech sector – or what’s left of it. High-tech companies now account for a razor-thin 1.6 per cent of Canada’s benchmark stock index, the TSX composite (excluding SXC, which is now counted as a health care stock). That’s down from a staggering 41 per cent in July, 2000, near the peak of the tech bubble, when Nortel Networks Corp. accounted for more than one-third of the index. That steep decline isn’t just due to Nortel’s demise: High-tech names have been vanishing from the radar in Canada at an alarming rate. Last year, 45 Canadian tech firms were snapped up by foreign buyers, up from 32 the year before and less than 15 per year in the mid-2000s, according to Branham Group, an Ottawa market research firm.

Worse, most of those companies are selling out too early, before they have a chance to grow into larger, global businesses that could fuel further innovation and success in the tech sector, say industry insiders and observers. The blame is squarely pointed at what they call a “broken” financing system, starting with wary, previously burned angel investors, a timid, underfunded and inexperienced venture capital industry, and moving up to institutional investors who are still smarting from their experience with Nortel stock. Many Bay Street investment dealers have lost all interest in the sector, content with the flow of deals in mining and oil and gas. Equity offerings from technology companies represented less than 4 per cent of deals on the TSX in each of the past four years, down from more than 20 per cent a decade ago. That means investment banks are cutting back on technology research. “The amount of resources the major firms on the Street have dedicated to following tech has been rationalized significantly,” says Tom Astle, a former Merrill Lynch analyst who is now director of research with Byron Capital Markets, a boutique tech-focused investment banking firm.

Without big companies at the top of the high-tech food chain – and increasingly, with mid-market companies vanishing as well – it’s like cutting off oxygen to the rest of the sector. “You need a whole ecosystem, from big anchor companies down to entrepreneurial shops,” said Adam Chowaniec, one of Canada’s most successful high-tech entrepreneurs and chairman of Startup Canada, an organization that helps foster entrepreneurs. “If you strip off big chunks of that, you’re in trouble.” It is the large companies that develop the sector’s infrastructure, spin off companies, recruit the big-name talent from abroad, tap the services of other local companies and feed startups when their own entrepreneurial employees leave.

But the continued decline of the sector – with its high-paid, knowledge-based jobs, intellectual property and pursuit of innovation – also has real implications for a resource-based economy coming off an extended bull run in commodity prices. The federal government has taken notice. In its recent budget, the government announced it will pour $400-million into Canadian venture capital, and Finance Minister Jim Flaherty has tapped Sam Duboc, one of Canada’s most successful venture capital investors, to provide advice on how best to deploy the money. But is that enough to create an environment that will produce the next RIM, the next SXC?

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