Tech Futures:
August 11, 2000
By Michael
Volker
The Past/Future Dichotomy,
Abatis tops HotHaus, IPO Watch, CPC Done Deals & Capital Pool Corps
Update
The Past/Future Dichotomy
I believe that there's an opportunity to profit
from the dichotomy between future expectations and historical performance. I
find it amusing that technology stocks on one hand are priced on the basis of
future expectations (hence the name of this column, "Technology
Futures") yet on the other hand markets determine pricing (especially in
the short term) on the basis of past performance.
A slightly lower-than-expected quarterly
earnings report can easily knock 30 or 40% off the value of a stock.
For example, Creo Products Inc (NASDAQ:CREO)
went public exactly a year ago last summer (Aug 12) at US$15. During the year
the stock has traded in the US$15.62 to US$52 range, and is currently priced
around $29. In this column a month ago I suggested that it might be a good buy
when it was trading at $21. It had dropped because some analysts were a bit
skittish about the fact that Creo's earnings were impacted slightly as a result
of some mild indigestion caused by Creo's recent acquisition of Scitex. Well,
what did you expect? Of course, there'll be some glitches. But, if you take the
long view, it's a better deal this year than it was last year, and one could buy
it at near-IPO prices.
The other hot stock of last summer was Pivotal
Corporation (NASDAQ:PVTL), a North Vancouver software producer which
conducted its initial public offering of 3,500,000 common shares last August
5,at a price of US$12 per share. Pivotal has traded in a range from US$12 to
$75.82 and, it too, was on sale recently - close to its IPO levels.
What I'm really saying is that by focusing on
a company's future potential one can find some buying opportunities as the
short-term traders bail out when the ride gets a little rough.
Abatis Tops HotHaus
Last summer, HotHaus Technologies Inc
was acquired by Broadcom Corp (NASDAQ:BRCM) for C$414 million - the
biggest private tech company takeover in B.C. HotHaus was only 5 years old with
50 people.
This summer, Redback Networks (NASDAQ:RBAK)
announced that it plans to acquire Burnaby start-up Abatis Systems for
U$636 million (i.e. 5.2 million shares of Redback) in order to build
Internet-based services, such as videoconferencing and movies on demand, into
its networking equipment.
Abatis was founded only two years ago by Adam
Lorant and Paul Terry, both former managers with Ottawa-based Newbridge Networks
who arrived in B.C. in 1996 to run the ATM (asynchronous transfer mode) research
unit acquired by Newbridge that year from MPR Teltech Ltd. (Note - another
MPR Teltech spinout! I wonder if BC Tel ever knew what it was giving up!)
Abatis numbers 126 employees. As the Globe's
Wendy Stueck noted, that's $5.3 million per employee!
Sunnyvale, Calif.-based Redback builds
networking equipment that allows telecommunications carriers and Internet
service providers to offer high-speed Net access, such as digital subscriber
line (DSL) and cable.
Redback is a typical Nasdaq success story.
Founded in 1996, it began trading publicly in May of last year at $5.75 a share
and peaked in March at $190, despite posting 1999 revenues of just $64 million.
It's the second time that Redback has bought a
company with a Burnaby connection. Redback acquired Siara Systems Inc. of
California which has research and development facilities just around the corner
from Abatis.
It speaks well of Canada's prominence as an
R&D performer - one of the best countries in the world for doing R&D (in
spite of high taxes, it still wins out).
Is this a sellout? I don't think so. History
proves that many of the acquisitons stay put and grow here - adding many new
stock market millionaires to our high tech scene which, I trust, will all become
angel investors themselves to stimulate even more new venture creation activity
in the province.
Since the deal was announced, Redback shares
gained some $30 to trade at US$151. That now values the Abatis deal at more than
Cdn$1 billion!
Another healthy B.C. deal involved a Kelowna
software company - Workfire Development Corp which was acquired last
month for US$80 million (i.e. 2 million common shares then valued at $40/share)
by Packeteer Inc. (NASDAQ:PKTR) of Silicon Valley. Workfire is a
20-person 3-year old company making software to accelerate the performance of
internet based applications software. Packeteer itself is not all that large.
Last year it reported sales of US$18.4 million (loss of US$10.9 million) but its
stock is trading around $45 giving it a market cap of US$1.23 billion!
Why the generous take-over valuations? U.S.
accounting practices permit, under certain conditions, a so-called "pooling
of interest" transaction whereby acquisitors can effectively issue
zero-cost founders shares as consideration for the acquisition. This means that
no goodwill appears on the balance sheet which will someday have to be written
off - as is the practice in Canada. Although the American practice is under
review, in the meantime it lets companies benefit from any inflated valuations
on their own stock by using it as the currency which with they can acquire new
companies and new talent. Often, the dilution is less than that experienced by
employees exercising their stock options.
So, in the grand scheme of the high tech world,
is U$600m+ a big deal? Look at at this way, Charles Wang, founder of Computer
Associates made more than U$650 million in take-home pay last year (#1 ranked
according to Forbes Magazine). That includes U$645 in stock vesting. Who said
life was tough?
IPO Watch
Compared to last summer, it's quiet on the IPO
front in B.C. I'd like to be able to report on RTO (reverse take-over) style
transactions by which companies go public, but other than the CPC process (see
below) it's difficult to cull these from the various stock databases. Referrals
and tips are welcomed!
An example of a transaction which is not
exactly an IPO, is VOCALSCAPE Communications of Vancouver. It is
currently awaiting regulatory approval to be acquired by Blackwater Gold Corp.
(BWG:V). VOCALSCAPE was recently named in the Branham 250 as one of Canada's top
fifty web development service companies by National Post Business magazine.
VOCALSCAPE specializes in Voice-over Internet
protocol (VOIP) or Internet telephony. The company has a number of products and
services which include the VOCALcommerce service that will allow customers to
call a company toll-free at the click of a "Call Now" button embedded
on a Web site; VOCALvillage, an Internet telephone portal service which will
provide telephone conferencing, call management, directories and voice mail; and
HelloEarth, which gives travelling executives a unique laptop installed
telephone directory from which they can make phone calls to anywhere in the
world.
CST Coldswitch Technologies Inc (CST) is
now completing its IPO and should start to trade on the CDNX (tentative symbol:
LS) sometime later next week. CST offered, through it's agent, Canaccord
Capital Corp, a total of 4 million common shares at $1.00 per share. This
represents just over 22% of the company on a fully diluted basis.
You can get a full prospectus on
the Sedar website at http://www.sedar.com.
And in our education corner, let's
learn some IPO jargon. This week's question: What is a "best-efforts"
offering?. Here's the answer from the EDGAR website: An agreement by which the
underwriters of an IPO will do their best to sell the company's shares to the
public. Since there is no guarantee of how much capital might be raised for the
issuer, smaller companies, or others that have had trouble exciting the major
investment banks about their offering, are more likely to use best-effort
underwriters. Best efforts offerings were more common pre-1900 (they still are
on junior exchanges).
CPC Done Deals
To date, in the 2+ years since
the Capital Pool Corps ("CPCs"), formerly Venture Capital Pools, have
been allowed in B.C. by the B.C. Securities Commission, only 15 out of more than
100 newly formed companies, have consummated their so-called "Qualifying
Transactions" giving them the rite of passage to a regular listed company
on the CDNX.
This is actually a good sign
insofar as it means that deals are not done hastily without due process. In
fact, many get aborted because the due diligence activities undertaken by their
boards result in unfavorable findings.
Of the 15 done deals, it looks
like most of them are technology deals.
So what deals have been done to
date?
Here's a brief summary:
| Company |
Original
CPC Name |
Symbol |
IPO
Price |
9Aug00
Price |
| Analytical
Software Inc |
Empire Technologies (ET) |
AYL.V |
0.20 |
1.22 |
| BCY
Ventures Inc |
same |
BCY.V |
0.20 |
0.62 |
| Bellwether
Capital Corp |
same |
BLW.V |
0.20 |
0.25 |
| Burcon
Capital Corp |
same |
BU.V |
0.20 |
3.90 |
| CHK
Wireless Technologies |
Ayers Capital Corp (AYS) |
CHK.V |
0.25 |
0.79 |
| Daybreak
Energy Corp |
Empress Capital Corp (EPR) |
DBK.V |
0.20 |
0.78 |
| Discovery
Capital Corp |
Ex Fund (A) Capital Corp |
DVY.V |
0.20 |
1.40 |
| DXStorm.com
Inc |
West Park Resources Inc (WEP) |
DXS.V |
0.20 |
0.64 |
| Imagis
Technologies Inc. |
Colloqium Capital Corp |
NAB.V |
0.30 |
3.18 |
| Lasik
Vision |
FVC First Venture Capital
Corp (FVC) |
LSK.V |
0.20 |
0.93 |
| P.Z.Resort
Systems Inc |
IX Capital Inc (IXI) |
LLX.V |
0.17 |
0.60 |
| Pheromone
Sciences Corp |
Mecca
Medi-Tech Inc. (MEC) |
PHS.V |
0.20 |
1.24 |
| Raystar
Enterprises Ltd |
same |
RYA.V |
0.20 |
0.34 |
| Starfire
Technologies Inc |
8 Crown Capital Corp (ECC) |
SFI.V |
0.20 |
2.90 |
| Zconnexx
Corporation |
Capital
Charter Corp (CLP) |
ZXX.V |
0.17 |
0.81 |
Interestingly, with few
exceptions, post-QT stock prices have not risen substantially with respect to
pre-QT pricing (sometimes to the contrary). But hey - they're still young!
Capital Pool Corporation (CPC)
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies (see chart below) as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. CPC's are the continuation of the
former VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment
perspective. Although one may regard them as speculative (indeed, they are),
they are also an inexpensive way of getting in early and inexpensively. You can
pick up 10,000 shares of a typical CPC for less than $1.00. And when it does
what is expected, you can reap a nice reward. On average, CPC share prices have
appreciated over 200% from their IPO pricing. The real money, though, will be
made once they complete their acquisitions of real operating companies.
Empire Technologies (CDNX:ET)
recently completed its Qualifying Transaction, allowing it to graduate from the
CPC "board". It acquired Analytical Software Inc and has
changed its name to same and is trading around $1.20 under the "AYL"
ticker on CDNX.
Check
our Capital Pool
Corporation chart for a complete updated list of the CDNX's CPC and VCP
companies, thanks to David Ing of Pacific International Securities.
An introductory article explaining
CPCs may be found at http://www.bctechnology.com/statics/mvolker-jun0200.html
Footnotes
Did you see what happened to Xillix
Tech Corp's (TSE: XLX) price lately? It recently bounced back to over $1.00
having recovered from a low of $.135. Xillix was embroiled in a bitter patent
fight with Olympus Optical of Japan. But they've now tossed their sumo wrestling
garb and are friends again. Will the run-up continue?
Information on local tech events
may be found on-line at http://www.vef.org.
For a convenient printable version
of this column, click
here.
Michael Volker is the
Director of the University/Industry Liaison Office at Simon Fraser University,
Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He
owns shares in many of the companies he writes about. Contact: mike@risktaker.com.
Copyright,
2000.
What Do
You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly column that
focuses attention on new and emerging BC publicly listed technology companies.
Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com
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