Technology companies that flocked to the Toronto Stock Exchange during the pandemic continue to reverse course.
On Monday Q4 Inc., a Toronto company that sells digital tools that public companies use to host shareholder meetings, said it had signed an agreement to end its own two-year run as a public company – the sixth such TSX-listed tech company to do so out of the 20 that went public from mid-2020 through late 2021.
Q4 QFOR-T agreed to a buyout at $6.05 a share by Silicon Valley-based Sumeru Equity Partners, valuing it at $257-million. That is a 36-per-cent premium to Q4′s closing price on Friday but barely half of its $12 IPO issue price 25 months ago. The stock jumped by 34 per cent on the news.
Investors holding 34.1 per cent of the stock, including chief executive Darrell Heaps, Ten Coves Capital, director Neil Murdoch and another unnamed shareholder have agreed to roll over their shares and keep a stake once the deal is done. Q4 said the deal came out of a review process after it received interest from Sumeru and others and that Sumeru’s offer price fell within a fair market value assessment by brokerage Stifel Nicolaus Canada. Q4 has 35 days to shop for higher offers. If it ends the deal Q4 will pay Sumeru a break fee of up to $9-million.
Q4 follows MindBeacon Holdings Inc. and Dialogue Health Technologies Inc., both of which agreed to takeovers below their issue prices in 2021 and 2023, respectively, and BBTV Holdings Inc., which agreed last month to a go-private transaction led by CEO Shahrzad Rafati at 37.5 cents a share, down 97 per cent from the 2020 issue price.
Also this year online auto marketplace E Automotive Inc. delisted from the TSX while private equity giant Thoma Bravo bought U.S.-based Magnet Forensics Inc. for $1.8-billion at $44.25 a share, well above its $17 share IPO price from 2021. The latter takeover materialized after Thoma outbid the Waterloo, Ont., company for another cyber-investigations software provider, then offered to buy Magnet and merge the two under the Canadian company’s leaders, Adam Belsher and Jad Saliba. The pair rolled over some of their shares along with those of chairman Jim Balsillie.
Ernest Wong, head of research with Baskin Wealth Management, posted on social-media platform X, formerly Twitter, on Monday that the Q4 deal shows management is “misaligned” with other investors, as “no one makes money except those who bought at the absolute bottom” while management “gets to rollover their stock so they get all the upside.”
All 20 tech companies that went public on the TSX as valuations soared in the pandemic saw their shares subsequently fall below their issue prices, and most are still below those levels. Several companies have recently tested the public markets with IPOs in the U.S., including chip maker Arm Holdings PLC, digital marketer Klaviyo Inc. and two drug discovery startups with Canadian roots, enGene Holdings Inc. and Turnstone Biologics Corp. Their stocks quickly slumped, indicating public investors are still cool to new issues.
The six deals aren’t the only recent privatizations as cash-rich buyers have taken advantage of market weakness to buy companies at prices lower than they commanded before interest-rate worries arose in 2021. Toronto-based Neighbourly Pharmacy Inc. agreed last month to be taken private by shareholder Persistence Capital Partners. Crosspoint Capital Partners in July bought Vancouver’s Absolute Software Corp. for US$870-million after years of weak stock performance.
Q4 has been one of many tech companies that have pushed to reach profitability and win back investors. On Monday Q4 reported adjusted operating loss in the third quarter shrank to US$1.9-million from a loss of US$7.5-million in the year-earlier period. Revenue grew by a paltry 3.5 per cent year over year, reaching $14.7-million. Q4′s quarterly net loss was $3.7-million.
Mr. Heaps said in an interview he was “pleased to be able to continue our journey, find a really good partner and continue executing on our strategies.”
Asked if he was disappointed by Q4′s stock performance, Mr. Heaps replied: “No. The macro is something we don’t control. What we can control is our own execution in how we drive and create value for customers, so I’m happy this helps us do more of that.” He also said Q4 could go public again “down the road.”
The Sumeru offer requires the support of two-thirds of shareholders plus a majority of investors who aren’t rolling over their shares. RBC Capital markets analysts Maxim Matushansky and Paul Treiber said in a note that given Q4 has missed analyst expectations for six of its eight quarters as a public company, the weak macroeconomic and IPO environment and the premium offered, “the acquisition is attractive and provides certainty to shareholders.”