U.S. financial services giant Morgan Stanley is buying Calgary-based Solium Capital Inc. for $1.1-billion in the latest deal that will wrest a sizable technology player from Canadian control.
The friendly transaction represents Morgan Stanley’s largest acquisition since the financial crisis in 2008, and allows it to meld its corporate wealth-management business with Solium’s software, used for administering employee stock-based compensation plans around the world.
Morgan Stanley already knew the Solium business well – it has outsourced equity-plan administration for its clients to the Canadian firm since 2016. It sees equity compensation as a major growth area as more young people enter the work force and take advantage of such benefits.
“We know that stock-plan participants on average are significantly younger than our average client base in the wealth-management business, and so this gives us an opportunity to begin working with them when their wealth is being created,” Brian McDonald, head of corporate and digital solutions for Morgan Stanley’s wealth-management division, said in an interview.
It is offering $19.15 in cash for each Solium share, a hefty 43-per-cent premium over Friday’s closing price on the Toronto Stock Exchange. Solium’s biggest shareholders are Mawer Investment Management and Solium chairman Michael Broadfoot, each with more than 10 per cent of the stock, according to Bloomberg.
Morgan Stanley plans to keep Solium’s 800 employees, including Marcos Lopez, the company’s chief executive, who will remain in Calgary to run the business for the new owner.
“We’ve had a kind of two-year test drive with them, so they know our culture really well and they know our platform really well,” Mr. Lopez told The Globe and Mail. “So they came into it as a very knowledgeable buyer, and they were able to meet the hurdle that we, as a board, felt was a fair price for our shareholders.”
The Canadian firm has 3,000 stock-plan clients with about one million participants. It’s been a quiet success story and a consolidator in a niche business, starting as a brokerage with a technology arm in the late 1990s before restructuring early in the past decade to concentrate on web-based software for administering employee stock plans, largely for Canadian energy companies.
It expanded in Canada before opening a New York office in 2005 and bought Michigan-based Allecon Stock Associates two years later, giving it a large foothold in the United States. Solium has made several acquisitions since then, expanding its operations into Britain, Australia, France and Germany. Its last purchase was Advanced-HR, a San Francisco-based provider of compensation data and planning software, in 2018.
Some of its clients include Royal Bank of Canada, Cineplex Inc., Dropbox Inc., Levi Strauss & Co. and Shopify Inc.
Fast growth in its numbers of big name customers shows the confidence the market has in its platform, said Jeff Mo, portfolio manager at Mawer.
“Although the premium is healthy and is a fair, risk-adjusted price, Mawer is always sad to see a wealth-creating company go, especially when one with great long-term upside sees public participation in its growth truncated,” Mr. Mo said in an email.
Indeed, the deal further shrinks the field of billion-dollar Canadian tech companies, following the sales last year of Vancouver-based Avigilon Corp. and Ottawa’s Mitel Networks Corp. Canadian tech companies become attractive to U.S. buyers once their revenues enter the $50-million to $100-million range, said Tom Liston, executive vice-president at Toronto-based private-equity firm Difference Capital. To remain independent above that level they require executives with global experience.
The activity leaves Canadian investors with less variety, especially compared with U.S. stock exchanges.
“It would be much healthier if we had a lot more Shopifys, companies that are able to punch through and keep their organic growth going,” Mr. Liston said. “It’s good for shareholders in the interim, but the TSX is weighted to oil and gas, financial services and mining. You’d like to see more diversity. You’d like to see more multibillion-dollar companies staying public.”
Mr. Lopez said, however, that his firm’s takeover by Morgan Stanley leaves talent and technology in Canada, rather than hollowing it out.
“We should be more concerned as a nation when we see companies leave – lay their staff off and retrench back because it’s a hard place to do business,” he said. “This is a situation with Morgan Stanley finding technology they love that happens to be built in Canada and they continue to believe that’s where it should be built.”