Government takes warrants in firmsMitel and March Networks secure TPC funds for $240-million R&D project

The federal government has announced a unique, $60-million investment in a massive R&D project for broadband applications that holds the potential for establishing a major new cluster in the Ottawa region. Technology Partnerships Canada (TPC) will contribute 25% of the cost of the $240-million project now underway at Mitel Networks Corp and March Networks Corp of Ottawa. Both companies are majority owned by Dr Terence Matthews, a major force in the telecom sector for more than 30 years.

The federal contribution of up to $60 million will be made through the purchase of special warrants over a three-year period, marking the first time such a mechanism has been used by TPC.

TPC assistance will allow Mitel and March to significantly accelerate their R&D activities to develop a range of broadband products combining voice, video and data capabilities and aimed at the growing e-health, e-learning, e-business and e-government sectors. The timing of the project is considered critical as the markets for broadband applications are set to explode within the next year.

The project is good news for the Ottawa region, which has been hit hard by the downturn in the information and communications technologies (ICT) sector. Observers say the increased activity will spill out into the business and academic communities as other firms become involved in related activity and post-secondary institutions partner in the resulting R&D.

“There’s no doubt at all that broadband applications are the next big generation of new business, and we’re right there on the leading edge,” says Matthews, chairman of Mitel Networks and chairman/CEO of March Networks. “That extra (TPC) funding can make a massive difference to the marketability, to the ability of the company to make applications of the kind we’re developing here. Over the next 12 months you’ll be quite surprised at the extent of the take-up of the new generations of technology.”

A major thrust of the R&D being performed is telehealth applications, following the success of a major pilot project in Halifax last year. The $1.25-million pilot (including $250,000 from CANARIE Inc) used applications developed by March Networks to enable remote nursing visits to about 140 homecare patients. The pilot deployed interactive video, audio and data transmission over high-speed, broadband IP networks, demonstrating how broadband can be used to improve patient care and reduce costs.

Opportunities for innovative applications are also emerging in many other areas including the food retail industry, insurance and manufacturing to name a few. Matthews recently completed a round of visits to major telecom firms in Europe and he returned convinced that the timing of his companies’ project is ideal.

“There is absolutely no doubt that our timing is perfect, whether it’s customers I’ve talked to in Spain, Italy, New Zealand, Australia, right around the planet,” he says. “We see it every day in feedback from our clients.”

Mitel and March are both privately held but Mitel does release R&D spending data and revenues. In FY01, they amounted to $95 million and $607 million respectively, for an R&D intensity of 15.7%. The broadband project is certain to push its R&D spending significantly higher.

Broadband infrastructure deployment in Canada and elsewhere in the industrialized world is largely complete, and the rush is on to develop applications that utilize the capacity. Rather than cash in on killer applications, firms such as Mitel and March are taking a more pragmatic approach.

“These sound like build-for-purpose applications rather than killer applications,” says Dr Robert Crawhall, president of the National Capital Institute of Telecommunications. “With broadband you can start to create a whole different set of person-to-person and machine-to-machine applications. They tend to be always on, reliable and are often mobile.”

COMPLEX DEAL

TPC and Mitel/March hammered out the agreement that will see TPC purchase warrants at the end of each September for a three-year period for 25% of the value of R&D undertaken in the preceding year. The decision to use warrants rather than the standard TPC practice of taking a royalty position was prompted by the broad range of R&D activity covered under the agreement.

“We’re making an investment across the whole R&D platform of both March and Mitel,” says Jeffrey Parker, TPC’s executive director. “Because of the size and breadth of investment, to try and identify what we might see as a rate of return on a product line of a division line didn’t make sense. Royalties just didn’t make sense.”

TPC is prohibited from holding common equity in the firms in which it invests. The warrants it receives in return for funding will be deposited directly with a trustee.

“The process is still being worked out but there will be a measure or mechanism put in place so that TPC will not be able to decide when to sell and when to hold,” says Terrence LeBlanc, a senior investment manager with TPC’s enabling technologies directorate. “These special warrants are not common equity but they come pretty close. It puts us in an equitable position with other investors so that we share the risk and rewards proportionately.”

Crawhall says the use of warrants by government represents a a novel approach to providing support for the ICT sector.

“It’s a very innovative approach to deal with with intellectual property and royalty issues. Innovating on the business model side could have broad ramifications, he says. “This investment is a sign that there’s a strong commitment to IT development. They getting behind the fact that IT is an engine of growth in a number of different ways. It’s a very positive sign for the Ottawa area.”

For the government, the TPC investment represents much more than assistance to the private sector in moving R&D to market. The use of Canada’s broadband infrastructure to enhance the delivery of health, education and government services accounts for a major component of its Innovation Agenda. And as health represents the largest portion of government spending, efficiencies derived through the application of broadband technologies will yield multiple benefits.

At the December 11 announcement of the TPC investment, Industry minister Alan Rock outlined part of the rationale for his government’s involvement in the project.

“At the recent Innovation Summit in Toronto, I suggested that we look at the spending we do in health care, not just as a burden to be borne but as an investment to be exploited,” says Rock. “By selling our technologies from the health care sector around the world, by developing our proprietary techniques and making them available to other countries and other companies, let’s make sure that our investment in health care reaps dividends for Canadian investors and businesses.”

The broadband project is expected to create about 420 new jobs during the R&D phase and a similar amount during market roll-out. The relationship between Mitel and government goes back decades to a $400,000 grant from the Industrial Research and Assistance Program in 1976. Matthews says that investment was instrumental developing the breakthrough technology that helped in the firm’s early success. Mitel exploded in size after marrying microprocessors with its proprietary telephone switching system, capturing 20% of the global market. He’s convinced that this latest investment could have a similar impact.

“I believe there is a very good chance that we can parallel that kind of performance around the planet,” says Matthews, adding that the impetus for the broadband project can be traced back to his involvement in the Information Highway Advisory Council of the mid 1990s. “Dramatic changes can be made with broadband (such as) converged voice, video and data applications, taking advantage of broadband’s characteristics of an always-on, IT multimedia.”

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