Silicon Valley Blues, Miscellaneous Musing,
Technology Financings, Capital Pool Corps Update
Silicon Valley Blues
Just recently I was heading south on Hwy 101 towards
Silicon Valley. Ironically, just as I was passing the huge Excite@Home (NASDAQ:ATHM)
office complex, a local radio station was playing some moody blues tunes.
Certainly, what's happening in the Valley these days is not music to many tech
investors' ears.
I'm familiar with the fate of many small cap tech
companies who couldn't make it, but I've never seen so many well-capitalized
large cap companies bite the dust. At least with high tech, you don't have to
wait long to see which ones make it and which ones don't.
The $7bn merger of Excite and @Home was big news last
year when the merged company decided to position itself as an internet content
play.
The Excite part of Excite@Home got its start in a Mexican
restaurant in the Valley in 1993 by a few computer geeks (PBS put out a great
series on the history of the 'Net featuring Excite which, at that time, called
itself Architext. I'm familiar with the company because Simon Fraser
University actually owns the Excite trademark - dating back to 1989 when it
used that as an acronym for Exemplary Centre for Integrated Technology in
Education. In fact, SFU even has a written agreement with Architext in which
they acknowledge SFU's rights in the trademark. The stock has crashed from U$95
to $0.48. Excite lost U$7.4bn last year (how can you "lose" that
much?) and needs only $100 million to make it to the end of the year.
Maybe some Vancouver angels can bail it out!
Lest you think trademarks are of intangible value, bear
in mind that the Coca-Cola TM was recently assessed at U$69 Billion!
(yes, that's a "B" - it's not a typo).
Exodus Communications (NASDAQ:EXDS) of Santa
Clara, CA, is another once promising firm struggling for survival. Exodus is one
of those "server-farm" companies which provides internet hosting
services to companies such as Yahoo and eBay. This week three of
its ten directors bailed out. Cash is tight. Exodus' U$3bn debt eats up
$75m in quarterly interest payments. With only $600 million in cash (down from
$1bn in March), the company may run out of cash before year-end. A second
quarter loss of almost the same amount, doesn't help the situation, either. The
stock has dropped by 98% to $1.10. If you're interested, the company is looking
for a buyer.
Metricom (NASDAQ:MCOMQ) which, among other things,
was offering a high speed wireless access service known as Ricochet in
the USA, files for bankruptcy protection in July. The company was planning to
liquidate its assets during August. Even with its 40,000 subscribers, it still
had a U$1Bn debt and no cash.
eBay Communications (NASDAQ:EBAY) is one of those
companies which is likely to survive. After all, they're making a handsome
profit by handling all the fire sales of the bankrupt companies. If you're in
the market for some computer gear, you can find some good deals these days.
eBay's stock is holding up at U$58+.
It strikes me that CASH (even though it's been said many
times by many folks) is perhaps the most important number to look at when
assessing a company.
Unlike the Silicon Valley casualties, JDS Uniphase
(NASDAQ:JDSU) has $1.8Bn (and no net cash drain) while Nortel has some $1.9Bn.
Unfortunately, Vancouver's 360networks (TSE:TSX) is the antithesis of
this having recently filed for bankruptcy protection.
The examples of 360networks and Exodus point out that not
only CASH on hand, but DEBT is just as important. You should really look at DEBT
as negative cash. Since this will likely put you in the hole right of the bat,
you might consider taking only the next 12 months of payments due against the
debt and reducing the cash position by this amount.
One way to assess a prospective investment opportunity in
a tech company is to analyze its cash position - especially those early stage
ventures which can't report Price/Earnings data or Sales. Board room
discussions these days tend to be focused on cash.
One problem which I've seen many times with small caps is
hitting the big caps as well. It's this: when you start running out of cash when
your stock is price is down, it's very difficult to go back to the public trough
for new equity. That's why Exodus is looking for a buyer. It has few
alternatives.
Tech companies are getting whacked on two fronts: their
own performance and current market conditions. In a bull market (I sometimes
wonder if the term "bull" came from all the hype) such as we saw last
year, non-performing companies, especially the pre-revenue ones, could still
attract investors. As you can read below under "technology
financings", companies with sizzle and promise can still raise capital even
in tough times. But, you've got to have a good story.
On the subject of market performance, using the P/E ratio
as a measure, one could conclude that stocks are still priced on the high side -
in spite of recent declines. Last week, according to Thomson Financial/First
Call, the Standard and Poor's (SP500) stock index of 500 stocks had an overall
P/E ratio of 22.2 (keep that number in mind if you're trying to pitch your
company to investors) which is above the long-term historical average of 14.5.
But, that's not comparing apples with apples. Thomson used something called
"operating earnings" for earnings used in the P/E calculation.
Operating earnings are not well defined and companies can "cook the
books" to show healthier earnings than what they should report under GAAP
(Generally Accepted Accounting Principles). Using GAAP, the P/E for the SP500
works out to 36.7 according to a Wall Street Journal report. Possible
conclusion: stocks are still overpriced based on performance.
In the tech world, though, we might as well check P/E's
out the window. P/E's may be OK for old economy companies (industrials, banking,
foods, etc) which, by their nature, are not speculative. I'm convinced that tech
stock prices are driven entirely by investors' perception. Indeed, many tech
stocks don't have earnings and many don't even have a top line. One of the worst
things that can happen to a tech company - from a stock performance perspective
- is when it actually achieves its business plan. Then, reality sets in, and the
potential no longer seems limitless. That's why, in addition to the fear of
technological obsolescence, tech companies always need to be breaking now ground
in the R&D area or looking at acquiring new R&D. Like it or not, it is
hype that drives valuations. Just keep that in mind when buying in - but don't
forget to check the cash situation.
Miscellaneous Musings
Small cap, CDNX-style, public are often criticized for
improper disclosure and dealing on insider information. Well, such improprieties
are not limited to the small players. Case in point: Air Canada was fined
$1 million for divulging inside information to a group of analysts prior to a
making a full public disclosure - after which its stock sank by around 12%.
Have you ever wondered what happens to the cash collected
from these fines? The Commissions which collect them - in this case the Ontario
Securities Commission (same thing holds for the BC Securities Commission) -
use them for "investor education". Seems to me that it might be better
to use this money for "corporate executive education". In this regard,
the B.C. Securities Commission is very keen to help companies practice
better corporate governance. For some time now, Simon Fraser University (SFU)
in conjunction with the CDNX and other firms, has been offering regular courses
to executives on this very topic. Check www.sfu.ca
for further information.
Whereas securities commissions are generally set up as
watchdogs to protect investor interests, the new B.C. government is making an
interesting structural change. Historically, the B.C. Securities Commission has
reported to the Ministry of Finance and Corporate Relations. Now, the
Commission will fall under the Ministry of Competition, Science and
Enterprise (interesting new name, but why not shorten it to something catchy
like Innovation BC?) headed up by Rick Thorpe and the
Ministry of State for Deregulation headed up by Kevin Falcon.
In other government news, the Premier announced the
composition of his special Premier's Technology Council. It consists of fourteen
fairly well-known figures in the tech sector. Eleven of these are CEOs or
executives of companies, 6 of which are CEOs from companies listed in the
T-Net20 (Ballard Power, Burntsand, CREO, Pivotal, Inflazyme Pharmaceuticals, and
PMC Sierra). It strikes me as being a fairly well-chosen group and the
strong industry/company orientation is good - maybe even a bit on the heavy
side. There could be a little more representation from the R&D sector in
B.C. The only rep with in this regard appears to be Dr. Victor Ling, VP
of Research at the BC Cancer Agency. Also, the small emerging tech
sector, with the possible exception of Shannon Byrne, CEO of Paradata
Systems Inc, does not appear sufficiently represented. The needs of new
enterprises can be quite different - especially with respect to government
policies - from those of more established enterprises. For example, there's
always been some debate about trade-offs between income tax breaks fro
professionals (to reverse the brain-drain) and investment tax breaks or
incentives (which is required to encourage angel and other start-up investors).
I never thought I'd hear myself say that there's too much industry (especially
senior) representation! OK, I confess my bias: I think Universities are key
drivers for the tech sector and it all begins with small entrepreneurial
companies. The Premier ought to have their ear, too.
I always thought that the tech sector was moving into
second or third spot in GDP contributions to the province. Now I hear that the BC
Pot Industry is grossing some $6Bn annually. Still being illegal, the
government seems to be missing a huge tax revenue opportunity here. Why not
legalize it (to quote Bob Marley who has been wailing for some time about this)
and collect some hefty taxes (would luxury taxes apply?). This could eliminate
the deficit.
Technology Financings
Technology companies are still managing to raise capital.
Here's a sampling of some recent financings:
Nxtphase Corp (still private) rounded up $30.4
million earlier this summer from about ten VC investors.
Datawest Solutions Inc (TSE:DS) received
$20 million (actually $20,000,002 - no, the extra $2 wasn't mine) from a dozen
investors including Pivotal Corp (NASDAQ:PVTL). Whenever I see investors such as
Pivotal Corp getting into a company, it's worth watching as a potential 100%
acquisition down the road.
Ignition Point Tech (CDNX:IPN), a developer of
broadband communications technologies raised && and, because its stock
price is cheap (at least to the board), it is planning to re-purchase some of
its own shares.
NTS Computer Systems Ltd (TSE:NTS) completed a
refinancing which included a $1.55 million loan and a conversion of $1.8 million
in bank debt into common shares.
Sideware Systems (TSE:SYDu) got 88 investors to
ante up with some $6.3 million.
Kinetek Pharmaceuticals, a private company which
was shooting for an IPO raised $16.5 million from QLT Inc (TSE:QLT) - see
my earlier remarks regarding the Pivotal/Datawest deal.
Ballard Power (TSE:BLD) raised $7.6 million from a
single investor, Graftech Inc.
Avcorp Industries (TSE:AVP) has agreed to a
private placement of up to two million units at a price of $1.75 per unit, to
raise gross proceeds of up to $7-million.
These financings are mainly of the private placement type
reserved for angels or well-heeled investors. But in the joe public category, eMedia-IT
Solutions has just filed its preliminary prospectus to raise between $1.5
million and $3 million via an IPO on CDNX.
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. They provide
companies with an alternative to traditional venture capital financing. CPCs are
the continuation of the former VCP and JCP programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Since the program
was launched, more than 250 CPCs have been formed and more than 30 have
completed their so-called Qualifying Transactions (QT). It takes at least a year
- usually longer - for a CPC to find a suitable takeover candidate and another
six months to a year for a deal to be finalized. One way to expedite the
process is to eliminate the need for a special shareholders meeting to approve
the deals - leave it up to the CPC boards.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities. This list is updated on a monthly basis. The
Chart is now current to July 31, 2001.
Recent additions to the list include American Reserve
Energy Corporation, Broadgate Capital Inc., Caravelle Capital Inc.,
Coronado Capital Corp., First Integrated Enterprises Ltd., Olympic
Ventures Ltd., Rap Capital Corporation, Rocky Old Man Energy Inc.,
Sydenham Capital Inc., and Vanguard Investments Corp.
Caravelle, Rap and Rocky Old Man are from Alberta.
Sydenham and Vanguard are from Ontario. American Reserve, Broadgate, Coronado,
First Integrated, and Olympic are from B.C.
Since the previous update, the following companies have
come to trade: Canden Capital Corp., Coventry Charter Corporation, Duft
Biotech Capital Ltd., Glenwood Ventures Inc., The Jenex Corporation, Nortec
Ventures Corp., OMNItech Capital Corp., and Xceleron Inc.
Since the previous update, the following four companies
have been removed from the list because they have completed their Qualifying
Transactions: Amex Ventures, Envirotrain,
EPS Capital and King Capital.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Footnotes
Now that summer's almost over
(drat! And, where's that mid-August rally anyway?), it might be time to check
out upcoming Fall meetings in the tech sector. A complete calendar of technology
events can be found on T-Net's
Events page.
SFU's TIME Centre is open
for business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business Centre"
(looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? Why hang out at
MacDonald's when you can work productively at the TIME Centre? Drop by and check
it out! It is located at SFU's downtown Harbour Centre campus at 515 West
Hastings St. More information can be found at www.sfu.ca/time.
PS - there are some great facilities for holding your company meetings.
For a convenient printable, pdf version of this
column, click
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