Tech Futures:
December 29, 2000
By Michael
Volker
B.C. Tech Market Strong, IPO's in
2000, Capital Pool Corps Update
B.C. Tech Market Strong
Market-wise, many regard the past year as a
market disaster. Not me, though. I'm still very optimistic - especially about
B.C. tech companies. Although the year started off splendidly with markets
hitting spring-time highs, it ended on a sobering down-note as investors
hammered prices.
Canadian markets and in particular, the B.C.
component, fared much better than the American markets. In fact, Canada ranked
fourth in Merrill Lynch's survey of world markets. The Toronto Stock Exchange
was up just over 4% on the year putting Canada just behind China (136%), Ireland
(12%), and Switzerland (5%). The U.S.'s Standard & Poor's index was down
over 10% while the American NASDAQ (a high tech barometer) was off 38% - its
worst year in its 28-year life.
And, what about B.C.? Well, the T-Net20 index
of the top 20 B.C. companies, ranked by market value, started the year off at
3892 and closed marginally up around 3920. The market value of the top 20 group
at the start of the year stood at $30 billion. At year-end, due to new entries
to the list, the top 20 valuation grew to over $50 billion. Not so shabby (as
Harry Jaako would say)!
The fact that our index stayed in positive
territory is most encouraging considering that more than half of its value comes
from companies listed on the NASDAQ - whose index fell almost 40% during the
year. And only 3 years ago, our top 20 was valued at a mere $6 billion.
So, why am I still so optimistic? It's a matter
of perspective - mainly how far you look backwards and how far you look forward.
If you look back only over the past year, you might be discouraged. If you look
back two or three years, you'll see some nice gains. As for looking forward,
I've maintained that our tech sector in B.C. is still in its infancy. Sure, we
regard some companies like PMC Sierra as having arrived. But they haven't.
They're still young companies by most standards and they still have a long way
to go.
Also,
more of us are getting into the game. It amazes
me how many people from all walks of life are investing in public company
stocks. In 1987 less than one-quarter of Canadians held stock as compared
the one-half today. In 2000,
Canada's economy performed better
than anyone expected. The economy grew 4.5% in 99. And it looks like 2000 will
check in at 5% when the tally's done. No
reason for pessimism, here.
At the start of 1999, the T-Net20 index stood
at 1400 and I was wishfully, obviously conservatively, prognosticating that the
index could "hit 2000 by 2000". Well, it almost doubled that number
prior to 2000. The fact that it hasn't moved much in 2000, is not that
surprising considering the rapid pre-2000 run-up.
The
quick profits realized in late 1999 and early 2000 must have been burning a few
holes in investors' pockets. That's why we've seen lots of new venture
investments. Over one-billion dollars was invested in Q3 by venture capitalists
in startup companies. This compares with $471 million
invested in the same period last year. More than $3.4 bn was invested in
the first nine months of 2000. In the same 9-month period, equity raised by
emerging companies listed on the CDNX totalled almost $2 Bn. Technology
companies accounted for 57 per cent ($1.1 billion) of this total.
A
year ago in this column, I suggested some stock picks for 2000. Let's see how
they fared. I suggested sticking with the top 20 list. Specifically, my
favorites in the Biotech group for speculative growth were Anormed Inc. (TSE:AOM,
$9) - now $20, Inex Pharmaceuticals (TSE:IEX,$6.50) - now $5 and Angiotech
Pharmaceuticals Inc. (TSE:ANP,$20) - now $60. In the infotech group, my
favorites were Creo Products Inc. (NASDAQ:CREO, $38.43) - now $20.50, Sierra
Wireless (TSE:SW, $65) - now $73, Infowave Wireless Messaging Inc (TSE:IW,
$16.15) - now $5.25, and Burntsand Inc (TSE:BRT, $4.35) - now at $4.05.
Just yesterday, Sierra Wireless got mercillessly nailed (by 11%) because of a
"miscommunication" about its 2001 financial projections.
What are the 2001 picks? Again, I'd stay with
many in the T-Net20 index. I'd increase my holdings (if I only had a lot) in
companies like Creo, Sierra Wireless, Burntsand, PMC-Sierra, and QLT
Inc - all of which can now be picked up well below their 2000 highs. Another
pick is Infowave Software (TSE:IW) which recently recruited Thomas Koll,
a VP at Microsoft, to the CEO post. He's also buying 200K shares in
the company as a sign of his commitment. Who says it's hard to attract talent to
B.C. companies?
Yes, B.C. is hot. We've got excellent
universities, colleges and research institutes. New R&D organizations
relating to fuel cell and new media technologies were created in 2000,
i.e. Fuel Cells Canada and the New Media Innovation Centre (NewMIC).
These recent initiatives complement the pro-tech infrastruture in B.C. which
consists of esteemed organizations such as the B.C. Science Council and
the B.C. Advanced Systems Institute with their highly successful early
stage financing and business development programs. There are tons of
opportunities which come to light at industry events offered by the Vancouver
Enterprise Forum and the many industry organizations (BCBA, BC-TIA, CATA, etc).
Even though there appears to be a retreat to
conservatism, Venture Capital coffers are at record levels and we're seeing more
and more early-stage Angel investors appearing in B.C.
Recent tax cuts and R&D incentives bode
well for our industry. If (when) Gordon Campbell takes over in 2001, we will, if
he keeps his promise, be the most attractive province tax-wise. It means that,
with respect to corporate taxes, B.C. could become the lowest-tax jurisdiction
in North America (Ontario and Alberta with their proposed 8% rate combined with
the 21% Federal tax are the current front-runners). And the promised cuts in
personal taxes will mitigate some of the oft-touted reasons for our overly
exaggerated brain drain.
It's funny how - as soon as we start taking
credit for raising some winners in B.C. - some are quick to point out that the
winners aren't really B.C. companies.
For example, in the Vancouver Sun's Dec 16th
business section, there was an interesting column on PMC-Sierra and whether or
not it is a B.C. company. I've mentioned this in various T-Net articles, mainly
lamenting the fact that it was not RRSP eligible. (see www.bctechnology.com/statics/mvolker-jun30)
Interestingly, PMCS is not a so-called
reporting issuer in B.C. Companies, regardless of where they are incorporated
need to file with SEDAR (www.sedar.com) if they want to offer re-saleable shares
to their employees and investors. SEDAR filings also allow the investing public
to readily look up information on a company. In PMCS' case, the filings are with
the American equivalent of SEDAR, namely EDGAR (www.edgar.com). The Globe and
Mail, for example, omitted PMCS for this reason from its top 1000 list.
Many of the companies which I refer to as
"B.C. companies" in my columns are, in fact, technically not
really B.C. companies - if you go by incorporation jurisdiction. Some are
Canadian Corporations (i.e. federally incorporated instead of being provincial
companies - this offers certain advantages for corporations) and others may be
incorporated in off-shore jurisdictions. Indeed, some "B.C. companies"
are incorporated in Bermuda, the Barbados, Delaware or elsewhere.
Due to the very nature of high tech, most tech
companies have subsidiaries and employees in several countries. Often, their
legal structure is driven by both tax and market considerations. Companies like
Pivotal Corp do most of their business and have many investors outside of
Canada. In fact, Pivotal even started off with a NASDAQ-only listing.
So, In determining whether or not a company is
a B.C. firm, such as for inclusion in the T-Net20, I've used the criterion of
having its headquarters or its mind and management based in B.C. For this
reason, companies like PMCS are included whereas companies like Electronic Arts
are excluded. MDA, for example, was excluded while it was owned and controlled
by Orbital Sciences but when it became independently listed with its corporate
management in B.C., we included it. If we get too particular with legal
definitions, we'd soon have no companies on our list.
Another reason why it is fair game to identify
firms like PMCS as local companies is because of their impact on the local
economy - the number of jobs they create, the taxes they pay, and also the
spin-off benefits such as the local tech investments made by the
multi-millionaires behind them.
IPO's in 2000
Earlier this year, the IPO market was hot. Many
companies started the going-public process in the hopes of attracting investment
at high valuations. Since the going public process from start to finish takes a
good nine months or so, many of the companies which caught the Spring fever were
chilled by the cool winds of Fall (when markets fell). Many IPOs were pulled
with companies citing "unfavorable market conditions".
Among the B.C. companies which postponed IPO
plans are: Kinetek Pharmaceuticals Inc which, just in March of this year
successfully raised just over $20M in a private second round (at least Kinetek
was able to benefit from a hot market then), WaveCom Electronics Inc. (www.wavecom.ca),
a Victoria, BC company which designs broadband transmission equipment for data
over cable and fixed broadband wireless networks, and Beanstream Internet
Commerce Inc, an internet software venture.
Those companies which went public earlier
benefited greatly by raising additional capital when their valuations were high.
A good example of this is Burntsand Inc. (TSE:BRT) which completed a
$49.5 Bn special warrant financing at $10.50.
Some of the notable IPOs (for B.C.) for 2000
included: Absolute Software (CDNX:ABT), 360Networks (NASDAQ: TSIX),
MacDonald Dettwiler & Associates (TSE: MDA), Chromos Molecular
Systems Inc (TSE:CHR), QHR Technologies Inc. (CDNX:QHR), CST
Coldswitch Technologies Inc (CDNX:LS), and Sourcesmith Industries Inc.(CDNX:SSM).
By the way, these Canadian IPOs have fared much
better than American ones. Only 8% of U.S. IPOs were up from their offering
prices. Not so with respect to the above mentioned B.C. IPOs! Studies have shown
that American's tend to over-price their IPOs (take note for future offerings).
If we count Capital Pool Corporations (CPC),
there have been many IPOs in B.C. These are covered elsewhere in this column.
A good example of a CPC is ExFund (A)
Capital Corp which acquired Discovery Capital Corporation (CDNX:DVY).
Discovery Capital's track record includes companies like Sierra Wireless Inc.
(TSE:SW), ALI Technologies Inc. (TSE: ALT), Dees Communications Inc.
(NASDAQ: NICE), and Inex Pharmaceuticals Corp. (TSE:IEX). Discovery
reviews over 500 new business plans a year. It's a great way to invest in
emerging B.C. tech ventures at an affordable share price.
You can get a full prospectus on any Canadian
IPO offering (or any Canadian public issuer for that matter) on the Sedar
website at http://www.sedar.com.
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 pennies.
I think of these as potential
junior technology IPOs. There are now 225 CPC companies have have been formed.
Of these, 27 have completed their qualifying transactions and are now trading as
regular public companies.
New additions to the list are ACP Ace
Venture Corporation, Arta Enterprises Inc., Developer Ventures Inc., ESS
Holdings Inc., Nova Canada Enterprises Ltd., Old Sun Resources Ltd., Seneca
Equities Corp. and Wise Wood Energy Ltd. All of these new entries are
from Alberta except for ACP Ace Venture Corporation and Nova Canada Enterprises
Ltd., which are from B.C.
Since the previous update, the following
companies have come to trade:Beanstalk Capital Corporation, Context Energy
Inc., Killam Properties Inc., QDM Ventures Ltd., Silicon Acquisition Inc.,
Southport Capital Corp., and Technology and Resource Capital Corp.
The following two companies have been deleted
from the list because they have completed their Qualifying Transactions: Advanced
Sensing Systems Inc. and EKZ Investments Ltd.
Check our Capital
Pool Corporation chart (in .pdf format) 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 www.bctechnology.com/statics/mvolker-jun02
Footnotes
I wish you all a very prosperous and successful
2001 (also sprach Zarathustra) - and may you reap many happy returns from your
investments in B.C.'s technology sector!
HAPPY NEW YEAR!!
For a convenient printable, pdf
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. 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.
Contact: mike@risktaker.com
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