Tech Futures:
September 8, 2000
By Michael
Volker
American - Canadian Deals
I
had an interesting discussion this week with a friend who is CEO of a NASDAQ
listed Silicon Valley software company (I won't mention its name for obvious
reasons). He's been doing business with Canadian firms for more than 20 years
and is currently in the process of negotiating the acquisition of a Canadian
software company.
In his own words,
"You Canadians have got some real bargains up there. I can acquire R&D
talent at half the price." Not only is the talent inexpensive
(salary-wise), but the acquisition price of the whole company is a fantastic
deal when compared to going rates in the U.S.
I had lunch with another
American friend from the Boston area (an angel investor and junior market
afficiondo) who also believed that
B.C. offered more than scenic attractions (he moved to Vancouver this summer).
He noted that the effective tax on capital gains is 28% in the U.S. versus 33% in Canada - not a
staggering difference. We all know that equity positions and stock options are
far more important to employees of technology firms than salary. Salary
incentives for Canadians to head south are offset when taking this into
account.
In recent columns, I talked about
some of the acquisitions of B.C. companies by Californian companies. We've seen
a number of these recently.
Redback Networks (NASDAQ:RBAK)
announced 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. Workfire Development
Corp of Kelowna was acquired last month for US$80 million by Packeteer Inc. (NASDAQ:PKTR).
Richmond-based Top Producer Systems Inc was sold to Homestore.com
(NASDAQ:HOMS) for $35.96 million in an all-stock deal.
And,
of course last
summer, HotHaus Technologies Inc was acquired by Broadcom Corp
(NASDAQ:BRCM) for C$414 million - at that time the biggest private tech company takeover in
B.C.
Regarding the
Workfire deal, Michel Comte reported in Business in Vancouver (Aug 15-21 issue) that Workfire
used to be a subsidiary of an OTCBB-traded company called Workfire.com Inc based
in Arizona. Apparently, the Sub was spun-off as a private company without a
great deal of investor awareness. Spinning off public company assets is not a
matter to be taken lightly. Some shareholders grumbled to the U.S. Securities
and Exchange Commission about the lack of disclosure. When company founder, Tom
Taylor, was questioned ,he deferred to the corporate lawyer and according to
Comte commented, "I'm not really up on this. I'm literally a scientist with
inch-thick glasses and six pens in my pocket." What a stupid thing for a scientist to
say! Most scientists I know are quite
savvy and to hide behind a white smock to escape investor criticism makes one
wonder!
This again reinforces my
frequently proclaimed negative bias about the OTCBB market. At the risk of being
repetitive, this is not a junior NASDAQ market as many would like us to
believe. In fact, I was amused this week when I heard the business reporter on
CKWX News 1130 refer to Fuzzy
Logic Software (OTCBB:FZZY.OB) as a NASDAQ company. I new that the
reporter was wrong as soon as she mentioned that the stock was trading at $.25.
Caveat emptor.
Of course, I'm not
implying that all OTC companies are flaky. Many choose the OTC because they
don't qualify for the NASDAQ smallcap and the OTC is the only American solution
available to them (although the Americans are taking a liking to the CDNX). An
example of a local OTC company which was written up in the National Post
recently is Destiny Media Technologies Inc.(OTCBB:DSNY).
Destiny's MPE technology is a media distribution system with built-in digital rights management, e-commerce and visual display.
The company targets musicians, record labels and distributors wanting their fair share of the digital music market.
MPE is a solution for safe digital content distribution. Content encoded in the MPE format - whether it is music (MP3),
video or text - can be posted anywhere and partially previewed in full quality, but can only be viewed in its entirety after a purchase
transaction has taken place.
To
illustrate my point about trying to be associated with NASDAQ, Destiny blatantly
states that it trades "on the OTC:Nasdaq under the symbol, DSNY".
Naughty!
What's Up?
What's
up in the junior markets? Or, should I say what's down? I'm always trying to
spot new shooting stars on the CDNX that are candidates for growth and
progression to the TSE or NASDAQ. A couple of years ago, we created the T-Net20
- a basket of the top B.C. companies by market capitalization. The value of
these companies, indexed at 1000 on Jan 1, 1998 is now in the 8000+ range. The
total market value was just under $6 billion at the time. It is now in excess of
$80 billion!
If you're wondering about
the math, i.e. why the index gained 8-fold, but the market cap gained 13-fold,
it's because of the inclusion of many new heavyweights which didn't exist just
two years ago. This would include companies like 360 Networks (in the
news a lot lately with lucrative multi-million dollar deals cooking), Creo
Products Inc., Pivotal Corp., Sierra Wireless Inc., and Anormed Inc - all of
which completed IPOs in the past 2 years.
I
thought that it would be interesting to take a look at the next 10 companies,
i.e. those ranked 21-30 by market cap. I expected to find some undiscovered
prospects. This list includes companies like Multiactive Software Inc (TSE:E),
Forbes Medi-Tech Inc (TSE:FMI), Inex Pharmaceuticals Corp, (TSE:IEX),
ID Biomedical Corp (TSE:IDB), Starfire Technologies International Inc
(TSE:SFI), Sierra Systems Group Inc (TSE:SSG), Spectrum Signal
Processing Inc (TSE:SSY), ALI Technologies Inc (TSE:ALT), Silent
Witness Enterprises Ltd (TSE:SWE) and Intrinsyc Software Inc (CDNX:ICS).
Other
than Starfire Technologies (a recently completed CPC transaction), none are
"undiscovered". They just got displaced by the likes of 360 Networks
and others. Many of these, like ALI Technologies Inc., may represent good value.
ALI was recently identified by Business in Vancouver as the fifth fastest
growing company in B.C. Trading at $4.70 in a 52-week range of $3.20 to $9.25,
it may warrant a closer look.
Speaking of
the T-Net20 index, more are being created. The City of Burnaby recently produced
its Top 10 pubco list and BMO-Nesbitt Burns has created an index of the top 100
Canadian tech ventures.
IPO Watch
There's not a lot happening on this front.
C'mon, you privco CEO's - let's see some action! Although IPO's are fairly easy
to spot on the horizon, companies going public via merger or acquisition are
tougher to spot. If you hear of any, let me know!
CST Coldswitch Technologies Inc (CDNX:LX)
completed its IPO and started trading on the CDNX on August 17th. The Company 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. The stock has traded in the $1.00 to $1.30 range
and is presently around $1.10. With just over 14.4 million shares outstanding,
the market cap is $16 million. This is a good example of a properly junior IPO,
i.e. one that is priced fairly without the company being short-changed while at
the same time trading at a small premium to the IPO price.
It's
not often that you'll see junior firms do a full-fledged IPO. The regulations,
the expense, and the risk of not completing an IPO are simply too much for many
juniors to bear. That's why RTOs and Capital Pools are so popular in the
micro-cap arena. It's refreshing, though, to see the odd one done!
You can get a full
prospectus on any IPO offering (or any Canadian public issuer for that matter)
on the Sedar website at http://www.sedar.com.
Suppose
you are lucky enough to get in on a hot IPO. Is it bad form to "flip"
your purchase and make a fast buck? Many underwriters would like investors to
stick with a new stock for a while. On the other hand, firms like
Standard & Poor's are recommending it. Without flipping there would be no aftermarket for
IPOs.
Insiders, the other owners of stock, are formally locked
out of the market for six months or more. When shares in a hot deal
are scarce, their price goes up, and with it the incentive
to flip. So, don't feel guilty if you're in this lucky situation. New CPC
offerings are a good example of this. Often, new CPC issues trade at healthy
premiums for the first few days or weeks and then both volume and price dwindle.
A good strategy for IPO participants would be to sell early and then later buy
back their positions with already-realized profits, effectively getting a
"free" position.
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.
In the past 4-6 weeks, there have
been a number of new additions to the list of CPC companies.
Those
originating in Alberta include Almont Capital Corp., CPC Capital Inc.,
Digital Nervous Systems Inc., Driver Energy Services Inc., Planet Organic Health Corp., Pure Lean Incorporated, Spelna
Capital Corporation, Longbow Energy Corp., and Sasha Corp.
The new entries from B.C. are: FiberQuest
Networks Corp., Willow Creek Capital Corp., Beanstalk Capital Corporation, Brightwave
Ventures Inc., Brockton Capital Corp., CCPC Biotech Inc., Kiwi Charter
Corp., Nortec Ventures Corp., Searchlight Venture
Corp., and Zena Capital Corp.
Eastern entries include CCPC
Biotech, which is from
Ontario. and Spelna Capital,
which is from Quebec.
The following CPC companies have
started to trade: Copacabana Capital Limited, New Media Capital Inc., Transcend Capital
Corporation, Trinity Ventures Ltd., and Venstone One Capital Corp., EKZ
Investments Ltd., and French Riviera Capital Inc.
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
I breathed a sigh
of relief when I read yesterday's paper that the Government's threat to
eliminate capital gains treatment on American Exchange Traded funds was
withdrawn. The intent was to not permit gains made on index funds like
the "CUBES" (NASDAQ:QQQ) - the NASDAQ 100, which includes
companies such as Burnaby's PMC Sierra (NASDAQ:PMCS) to be eligible for
capital gains treatment. The evil CCRA (Canada Customs and Revenue Agency as it
is now called) plot was to consider all such gains as ordinary income - fully
taxable at marginal rates. The justification was that this would somehow
recapture tax revenues lost due to offshore funds. Figure that out!
In the "recommendations" department,
I'd suggest another looksee at the Business Development Bank's Internet Notes (TSE:BDBn).
They are trading at US$9.00 but they are guaranteed for redemption by Her
Majesty at US$10.00 - so it's a no-lose proposition AND if the Basket of US
internet stocks (which include the likes of Microsoft) does well, you can
make many times your investment! I suspect that the price is where it is because
of a lack of promotion on an illiquid stock. The current "theoretical
value" of these notes i.e. the Basket's theoretical performance index was U$11.84
at July 31st. They've traded between U$8.75 and U$16.00 since they were
introduced by the BDB last year.
In
the "I-told-you-so" department, I was amused by a report last week
that many companies listed on the Montreal Stock Exchange want to move over to
the CDNX. Some months ago I commented that Quebec's political maneuvers would
likely lose out to market forces - i.e. that companies could not be forced to
trade on a limited, provincial market and that it would be detrimental to a
company's development. Although it shouldn't matter where a company's stock
trades, especially in today's on-line world, the interplay between a stock
exchange and the regulatory environment - in this case the Quebec Securities
Commission - creates the confusion. Alas, we need a national
commission!
Don't
forget - the Vancouver Enterprise Forum is starting up again this Fall with its
2000-2001 season. The first event will be held on September 26th and the topic
is early stage financing for new ventures. This was a popular event last year
and was sold out. So, book now. Details are at http://www.vef.org
as is information on various local tech events may be found on-line at http://www.vef.org.
For a convenient printable version of this
column, click here.
PS: My last column was the Aug.
11th edition. I took a little summer break since there wasn't a lot of market
action anyway.
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
Tech
Futures Archive
T-Net
20 High Tech Stock Index
© 2010 T-Net. All Rights Reserved. |