Silicon Valley software company ServiceNow Inc. has finalized its acquisition of Montreal’s Element AI Inc., closing the book on one of the most hyped tech companies to emerge from Canada in the past five years – but which failed to live up to lofty investor expectations.
Publicly traded ServiceNow said in a filing Thursday with the U.S. Securities and Exchange Commission it had paid “approximately US$230-million, subject to customary purchase price adjustments,” for Element AI, publicly acknowledging information that was first reported by The Globe and Mail last month.
Materials sent to Element AI shareholders in December revealed that while many institutional shareholders made most if not all of their money back from backing two venture financings, employees did not fare nearly as well.
Many were terminated and had their stock options cancelled. Co-founders Jean-François Gagné, the CEO, his wife Anne Martel, the chief administrative officer, chief science officer Nick Chapados and Yoshua Bengio, the University of Montreal professor known as a godfather of “deep learning,” had the value of their 8.8 million common shares wiped out in the deal, which was approved by shareholders in a Dec. 29 vote. The quartet also owned preferred shares for which they received less than US$300,000 combined under the terms of the deal.
Element AI struggled to secure financing last year after failing to live up to its early hype and capitalize on heavy early funding, including a US$102-million venture capital financing in 2017, nine months after its founding. Element burst onto the Canadian tech scene in 2016 like few others, promising to deliver artificial intelligence-powered operational improvements to a range of industries and anchor a thriving domestic AI sector. But it struggled to advance proofs of concept work to marketable products as it spent freely, at one point employing 500 people. Several client partnerships faltered in 2019 and 2020.
Element did manage to reach terms for a $200-million venture financing in September, 2019 led by the Caisse de dépôt et placement du Québec and backed by the Quebec government and consulting giant McKinsey & Co. However, The Globe reported last month it only received roughly half of the amount and failed to meet conditions required to secure the rest of it.
A fairness opinion by Deloitte commissioned as part of the sale process estimated Element AI’s enterprise value at just US$76-million around the time of the 2019 financing, shrinking to US$45-million last year. Its liquidity diminished through 2020 and Element AI was generating revenue at an annualized rate of just $10-million to $12-million before the sale, Deloitte said in its report. ServiceNow said in the filing it had obtained a waiver from the U.S. Securities and Exchange Commission to provide financial statements of Element and pro forma financial information related to the purchase.
Like other AI companies that have sold, Element AI is being acquired for its brains and intellectual property – including 84 patent filings and one patent – not its business. Element AI’s remaining employees will now work in a ServiceNow development centre to support development work on its Now software platform, used by corporate customers to digitize workflows.
As part of the deal – which will see ServiceNow keep Element AI’s research scientists and patents and effectively abandon its business – the buyer has agreed to pay US$10-million to retain key employees and consultants including Mr. Gagné and Dr. Bengio.
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