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Something Ventured
December 2nd, 2005
Tech IPO: Here We Go?
“With my New York brim
And my gold tooth displayed,
Nobody give me trouble cause
They know I got it made.
Welcome back, we’re nationwide,
I'm baaaaad, I'm nationwide.” – ZZ Top, I’m Bad, I’m Nationwide
As I munch on my cranberry blueberry muffin and sip my “regular”
large coffee this morning from my (and Canada’s) favourite donut
chain, I ponder the possibility of getting me some of this highly
profitable action. Yes folks, it’s true, Tim Horton’s is going public.
Wendy’s bought TH in 1995 and most of its collective profit since then
has come from the fanatical demand for a daily dose of donuts through
the 2,800 stores across Canada and the northern US. They are
spinning out the chain as a separate public company to try and capture
some of that incredible value. But rather than talk donuts and
“double-doubles” with you, I wanted to explore the public markets for
technology companies in Canada to see if they are as hot as a Tim’s
coffee… or not.
The IPO is the crowning success of any early stage investment as it
represents a liquidity event and a validation by the public that your
company is a success. Now I am talking IPO on the TSX or NASDAQ,
not the RTO or junior IPO which are more for capital raising. A large
IPO is definitely about capital raising, but it is also about liquidity,
which thinly traded juniors are not. We only need to gaze longingly at
IPOs in the US like Google to see that returns can be had at the IPO
value of the company and, assuming the company continues to grow
and execute, great returns after the IPO for early investors.
First, as usual, some data:
-
Capital inflows to technology mutual funds in the US and Canada
increased in late 2005 for the first time since mid-2000. People
believe that money is to be made in the black and blue
technology sector. Some say this is more of a rotation out of the
energy and commodity sectors that are running out of gas (pun
intended), but generally investment pundits think technology will
have an updraft over the next few years.
-
Miranda Technologies of Montreal is going public on the TSX next
week and has priced above its target range (to $11.25 a share)
and raised 40% more than it intended. Hungry investors are
lined up to drive this stock higher when it opens next week.
-
Genuity Capital Markets, the spin-off of CIBC World Markets, has
made their major sector focus in Canada… technology! What?
Are they nuts? Well, an un-named senior manager said that
Canada was full of profitable, exciting private technology
companies that would be as hot as Miranda and recent IPOs,
March Networks and VCom.
-
And yet, IPOs make up a small part of the successful exits in
Canada. Most of the liquidity for shareholders and investors
comes from M&A. The median value of tech IPOs in Canada in
the last 6 years (market cap) is $44M US, while it is $224M US
in the US. I think largely that is due to the so-called tech IPOs
on junior markets in Canada being very small, but it is still a
concern.
Not a wealth of positive data for technology IPOs, but some interesting
indicators to be sure.
So, are IPOs back for technology companies in Canada? If you meet
the qualifications of what makes a solid public company in terms of
performance, the world appears to be your oyster right now. But
those qualifications are tough. Number one, unless you are a
development stage biotech or fuel cell company, you need to be
profitable. Number two, you need to be showing great growth for at
least 6 quarters. Probably more.
On the profitability side, let’s look at the post IPO performance of the
last nine technology IPOs on the TSX and you will see what I mean (in
chronological order, most recent first):
VCom (VCM)
$8.00 IPO
Ascalade (ACG) $5.00
March (MN)
$13.00
Methylgene(MYG)$4.00
Q9 (Q)
$8.00
Xantrex (XTX)
$18.00
Guest-Tek(GTK) $11.00
$8.80 now
$4.50
$26.75
$1.85
$9.60
$7.65
$6.15
10% up
10% down
104% up
53% down
20% up
57% down
44% down
Very profitable
Barely profitable
Very profitable
Not profitable
Just profitable
Not profitable
Not profitable
180 Connect(NCT.U) $8.00
Workbrain(WB) $16.00
$3.10
$11.60
61% down Not profitable
27% down Profitable
With the exception of Workbrain, a late 2003 IPO that represented the
1st technology IPO since 2001 at that point, the profitable companies
have shown good stock appreciation since going public. Conversely,
those that can’t make money are getting pummeled. March has more
than doubled its revenue per quarter, which is outstanding growth.
Miranda has solid profits and growth, if you were wondering.
Let’s assume (hope?) that the Genuity spokesperson, that talked of
great private technology companies forming solid IPO deal flow for the
coming few years, is right. If so, many private Canadian tech
companies are growing in their markets and reaching profitability.
Assuming that you want to go public, your company must be able to
hold a market capitalization of >$200M if you want to get someone’s
attention at the bigger exchanges. That means annualized revenue of
at least $30-40M and superb growth (again, biotechs have their own
set of metrics not related to revenue and profit). Miranda did $70M in
revenue in the first 9 months of its current fiscal year. VCom has
annualized revenue of $70M now. March Networks just did a $20M
quarter. You get the picture.
But do we have companies showing that type of revenue and growth in
BC? {By the way, VCom may be listed as a BC company, but the
employees are all in Saskatoon. The CEO lives here, so you didn’t
miss a good one in our backyard}. The private companies are hard to
pry open and find out. There are a few rumored to be in the right
range. They may or may not be Convedia, ACL, Maddocks and
Abebooks.com to name a few. The only thing I can show you with
certainty is the public technology company record of profitability. It is
pretty dismal. I did a very un-scientific search of the news releases on
this very web site to look up our public technology companies and
counted those that are profitable in the latest quarter and those that
are touting a net loss. On a quick look, the score is 38 companies not
profitable to 10 that are profitable. Yikes.
For the record, I found the following profitable public technology
companies and I expect you to notify me of the ones I missed:
Bridges
Sierra Systems
Web Tech Wireless
MDA
Mainframe
Angiotech
Creo (now Kodak)
Gemcom
Ascalade
QLT
For every one that you submit to me that I missed as profitable, there
are likely 3-4 that aren’t if the ratio holds. Clearly, we need to
improve the profitability picture before going public in order to see
good stock growth. I guess another way of looking at our nest of
public tech companies in BC is that most of them would not qualify to
be public companies on the TSX in today’s market. And for junior
public companies or RTOs into junior shells this is exactly what they
hope to do someday, by becoming profitable.
So as you mull the idea of buying into the hottest IPO in Canadian
history (Tim Horton’s), consider the technology IPO as back, sort of.
It is back, but you need to be a bigger, profitable company to get the
big win. It’s going to be hard to get there without someone offering to
take you out along the way, especially if you are big, growing and
profitable.