Ottawa’s tech sector still looking for its heavyweights in 2006

By KRYSTLE CHOW
Published in the Ottawa Business Journal newspaper and website.
Dec. 18, 2006

Click here to view this article on OttawaBusinessJournal.com.

Year 2006 was a solid one for the tech sector, marked by the purchase of several vibrant, growing local companies and strong employment levels, but also by the tightening of venture capitalists’ purse strings.

“On a scale of one to 10, it was maybe a seven,” says Robert Ford of tech law firm Gowlings.

Mr. Ford notes that there have been a lot of exciting deals in the market, including some big venture capital plays such as Liquid Computing’s financing round and even Canadian companies buying U.S. firms.

“This shows that we’re a centre of excellence rather than simply an exporter of technology,” Mr. Ford says.

Merger-and-acquisition activity was strong in 2006 with far fewer “damage-control” deals than in previous years, says Paul LaBarge of law firm LaBarge Weinstein, stressing that a lot of the companies that were bought were vibrant organizations with solid futures. Mr. LaBarge points to several significant acquisitions in the Ottawa high-tech market as examples of this trend, including the Quake-Applied Microcircuits Corp (AMCC) deal and the purchase of Lumenera by Roper Industries.

“These are positive stories about what the Ottawa marketplace can do,” Mr. LaBarge says.

However, while the health of the mergers-and-acquisitions market would seem to indicate that Ottawa’s high-tech sector is going from strength to strength, there are still a few threats for local tech companies to worry about.

But PricewaterhouseCoopers’s business development director Bruce Raganold notes that the acquisition of Ottawa’s smaller tech companies is a double-edged sword.

“On the one hand, it’s good because these companies are getting money, but on the other hand, these acquisitions are happening at the early stage while they’re still only an R &D shop,” says Mr. Raganold, adding that these companies then don’t have the opportunity to develop their management teams, technologies and innovations. “There would be more value to Ottawa if these companies were larger when they were acquired.”

Meanwhile, many tech sector observers agree that venture capital funding is thin on the ground, especially for startup companies.

Another big worry for the high-tech market is the market consolidation of Ottawa’s big tech companies, says Mr. Ford.

“Four or five years ago, we had five tech companies competing on a global scale,” he says. “Now only one out of the five – Cognos – is still operating out of Ottawa … and there are few mentors for new local companies.”

The telecommunication industry’s big decisions this year are also of concern for the high-tech market in Ottawa, says Mr. LaBarge, since many of the big telecom players use local tech products in their operations.

“There’s a certain element of schizophrenia as the next level of telecom products try to find their identity within the market,” Mr. LaBarge says, explaining that telecommunication companies are still unsure about whether to invest in traditional hardline infrastructure or in the emerging Voice over Internet Protocol (VoIP) market. “All we know is more people want to communicate in more ways with more people; the way forward is not crystal-clear.”

He notes that investors are increasingly gun-shy about the uncertain telecom market, with all that means for local high-tech companies involved in supporting the industry.

However, Mr. Ford points out that the decision this week to speed up deregulation of the telecom industry will mean good things for the tech sector here, since the big players will be interested in offering new services to customers at a better price.

Quake shakes up market with AMCC

The largest deal involving a local company for which there was a disclosed value was the Quake-AMCC transaction in August. Mr. LaBarge and Mr. Ford both pointed to the deal as an example of a positive M &A market.

AMCC bought the local fabless semiconductor company for approximately US$80 million.

“It’s a wonderful example of a company growing at the grassroots level,” says Mr. LaBarge. “And it’s an indication of the city’s ability to grow companies fairly large.” He notes that Quake was a leader in a fairly narrow market, but it needed a bigger partner in order to raise the kind of capital required to play in a broader market.

“It’s a great example of the value created for Ottawa when companies can get funded,” Mr. LaBarge says.

“This deal created tens of millions for … a world-class company and a world-class group of people.”

Calling on Convedia

One of the more interesting deals of 2006 for the Ottawa market actually came out of the acquisition of a company based in Vancouver, Mr. Ford says.

Convedia, which provides VoIP-enabled media servers, was one of the last of the companies spun off from Terry Matthews’s Newbridge Networks family of firms to be purchased.

In September, the company was acquired by Oregon-based RadiSys for US$105 million with a $10-million cash earn-out.

Mr. Ford says Convedia can be considered a significant deal to Ottawa’s market for a number of reasons: besides being “incubated” by Ottawa-based Newbridge, many of Convedia’s executives, shareholders, and investors are from Ottawa, he explains.

“This was the biggest deal in Canada for a private tech company,” says Mr. Ford. “One of the benefits to the city is that a lot of money is being returned to Ottawa shareholders, and there are not that many examples in Canada of transactions like this which show a return to shareholders.”

The company’s co-founder, Grant Henderson, says the deal enabled the company to take advantage of new opportunities.

“We had the opportunity to scale and deliver our product more broadly, as RadiSys had a bigger global footprint,” says Mr. Henderson.

The deal also showcased to investors Ottawa’s expertise and excellence in the growing VoIP market.

“This deal represented the continuation of Canadian excellence in telecom, much of which has been centred in Ottawa,” he said.

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