Analysis - By Dr Adam Chowaniec

The loss of publically traded Canadian tech companies and what we can do about it

By Dr Adam Chowaniec

Although entrepreneurship is alive and well in Canada and we create a lot of new technology start-ups, many of these do not get to a size that has the ability to impact the economy in a major way. Another way of viewing that impact is that we need companies to grow up to build the critical mass behind the tech sector. That would enable more companies to prosper.

So why do we lose so many companies? I think there are three reasons. First, we are more risk averse than other countries and so finance our companies more poorly than their competitors. Second, we have weaker experienced business skills. And third, because of these two factors, we lose too many promising companies to acquisition at too early a stage in their evolution.

This is particularly troubling for companies that do manage to grow their way to public company status. These are the future ‘anchors' of the critical mass in major technology clusters in Canada.

anchor companies are key

Think of what Nortel Networks Corp did for Ottawa or Research In Motion Ltd for Waterloo. I believe we are now losing anchors at a faster rate than we can create them. Just this past 12 months, we have seen the acquisition of Mosaid, Zarlink, Dalsa, March and Bridgewater and now Ruggedcom. Before that we saw names like Cognos, Tundra, ATI, Newbridge, JDS, Corel and many more disappear.

So why should we care? First, because these public companies are the training grounds for that much needed experienced business talent we lack. Most business functions after an acquisition are centralized back to the acquirer, leaving an ‘R&D branch plant'. Second, entrepreneurial players are able to grow up because public companies are big enough to create local infrastructure, buy services and hire and train especially non-technical talent.

Most importantly, going public is almost the only route to securing risk capital for the quantum jump companies must make in their evolution to economic prominence. We have no developed private equity capital in the technology sector in Canada. As the number of public tech companies diminishes, there are fewer analysts covering the tech sector, fewer investment bankers with sector knowledge, less institutional (investor) knowledge, and therefore less risk capacity.

As a consequence, it's a much harder path to take companies public. Less risk capacity means poorer valuations for the remaining public companies, which of course makes them more vulnerable to acquisition. And hence the spiral goes on.

So our companies are more vulnerable than say our US peers because of a lower risk appetite in Canada, and therefore poorer valuations. There is little we can do to change this risk culture in the short run, although this is an issue worthy of much discussion. Our companies are also vulnerable because our securities legislation gives them much less protection than their US peers.

changing securities legislation

This, we can do something about. If you are faced with an acquisition as a US company, the board and the management team can effectively say no. In Canada, if a company is ‘put in play' you cannot say no, and the company will be sold. It's only a question of negotiating for the best price. US companies can be forced to sell, but it is a longer and more onerous process.

A modification of our rules along the same principles in Canada would return some of the decision making back to companies' managements and boards, without taking the final word away from investors. This would help avoid opportunistic approaches that take advantage of weaker valuations or volatility in a company's performance. The tools to do this are in modifying our legislation as it applies to shareholder rights plans.

A shareholder rights plan — or poison pill as it is sometimes referred to — is a mechanism by which a company can be given the authority to issue new shares in such a way as to dilute the ability of a hostile bidder to acquire the company. In Canada, this is put in place at the time of an impending bid. It is finite in time (usually 60 days) and can be appealed to the Ontario Securities Commission (OSC) so can be significantly less than 60 days (often referred to as an application to cease trade the plan). In effect it gives the company a very limited amount of time to find an alternative to the bidder at hopefully a better price. But it will not stop the transaction and there is not sufficient time to delineate all the possible alternatives.

The US version of a rights plan can be voted in anytime — usually at an Annual General Meeting — and does not have a fixed end point. It supports the concept that the fiduciary duty of the directors and management is to act in the best interest of the company and all its stakeholders, not just the shareholders who are extant at that time.

These ground rules make this a longer and more onerous process to make a bid, and highlight the need for a strategic rationale in moving ahead rather than just an opportunistic financial sortie. We should be lobbying the Ontario Securities Commission to do exactly this and swing the pendulum towards the US model.

Technology companies by their nature are volatile, especially public companies. Shifts in technology or markets or competition can at times blindside even the best management teams. Having the risk appetite and the legislative framework to weather these storms is crucial to the long term success of the technology sector in Canada.

Pick any very successful tech company and you will find that at some time it faced acquisition. But for those that survived as standalone companies, many contributed hugely to the economy in subsequent years. Apple is a case in point. It survived several trying times in its evolution but exists to be the star it is today.

The US peers and competitors that challenged some of my former companies are still growing. But we were acquired, despite in my view, that these US companies have poorer management teams, governance or products than we had. It's time to take action.

Dr Adam Chowaniec has over 30 years experience in the technology sector and has invested in and chaired numerous public and private corporations. He is currently Chair of BelAir Networks, Director of Solantro Semiconductor, holds a Privy Council appointment as a Director of Export Development Canada, and serves on the Private Sector Advisory Board of the Centres of Excellence for Commercialization and Research program.