Look Ahead: Steady and cautious for tech in 2008

Published in the Ottawa Business Journal newspaper and website.
Jan. 7, 2008

Click here to view this article on OttawaBusinessJournal.com.

Robert Ford says low VC levels and international consolidation will continue to drive M&As in 2008; however, the U.S. economic slowdown may push this activity down.
Robert Ford says low VC levels and international consolidation will continue to drive M&As in 2008; however, the U.S. economic slowdown may push this activity down.
Photo by DARREN BROWN for the Ottawa Business Journal

It doesn’t look like 2008 will be a breakthrough year for Ottawa’s high-tech companies, but the good news is that a downturn isn’t expected either, despite the U.S. economic slowdown, low funding levels and last year’s historic merger and acquisition activity.

With some of the biggest deals in Ottawa history seen in 2007, the forecast is that the momentum from those mergers and acquisitions is going to help activity levels in this area stay healthy, with only a slight dip expected this year.

Robert Ford, a technology lawyer with Gowlings Kanata, says there were several factors driving M&A activity in 2007: low-cost debt funding and private equity; strong equity prices, meaning that it was a good time to buy because company shares were worth a lot; international pressure and consolidation, and lack of venture capital.

“Three of those factors will drop this year – the low-cost funding, equity prices will fall a little bit with the U.S. slowdown, and private equity will fall off somewhat in response to exposure to asset-backed commercial paper,” Mr. Ford says. “However, there is still a lot of international sales pressure, which will drive some M&A and strategic buys, and the lack of venture capital means some companies will have to sell before their time in Ottawa, but it won’t be as furious.”

Mr. Ford says the pressure to consolidate in order to compete internationally is going to mean a lot
more mergers and purchases of smaller Ottawa companies, as in the IBM-Watchfire and Allen-Vanguard/Med-Eng deals.

However, there will be fewer mega-deals than in 2007 as the industry is still “digesting the large deals” of last year, says Cliff Taylor of PricewaterhouseCoopers, agreeing with Mr. Ford that there will be many strategic buys of Ottawa companies.

“There will be an increase in foreign deals in North America (in general), with foreign companies snapping up strategic technology to round out their own technology portfolios and to get their products to market faster than they can on their own,” Mr. Taylor says.

“As well, a lot of companies funded over the past five years now need an exit … a few go public, but usually they eventually get purchased because it’s the path of least resistance.” 

GrowthWorks Capital, which has been asserting its presence in several Ottawa venture deals and was one of Med-Eng’s investors, is expecting 2007’s momentum to carry Ottawa’s tech sector into the new year, according to Tim Lee, GrowthWorks senior vice-president of investments.

“I do like Ottawa’s prospects, and I think success begets success,” says Mr. Lee, noting that 2007 heralded several successful exits for GrowthWorks, including Med-Eng’s $650-million merger with Allen-Vanguard. “The supply of good companies is still relatively strong, with great technologies on a world-class basis and strong management teams, meaning high liquidity for Ottawa companies.”

Mr. Lee says it looks like there are more chances of an upswing than a negative turn in 2008, helped along by Ottawa’s ability to “keep a thick skin and maintain a positive spirit.”

Industry watchers are more reluctant, however, to express optimism about the trend in reverse of Ottawa companies buying up other firms.

“That’s a tougher question, because the companies in the position to make acquisitions tend to be in telecom and software, so it depends on valuations and what particular sectors do in 2008,” says Mr. Lee.

Mr. Taylor is even more skeptical that Ottawa companies will buy out on a large scale, since one of the last companies with a large enough wallet to purchase other smaller companies – Cognos – is no longer an independent player, although he says “inquisitive” companies like Enablence are firms to watch in this space as they seek to round out their production processes and boost operations.

“Unfortunately, our sweet spot is developing technology and it will continue to be what Ottawa’s about,” he says, noting that Ottawa’s hopes of becoming a big corporate centre dried up along with the flow of venture capital.

“It’s still predominantly foreigners coming in, and there are some darlings here in Ottawa who are innovative with pretty savvy technology, so we’re going see continued transactions in that area.”

The forecast is also rather cloudy for the public offering scene in 2008.

“The IPO market was fairly active in 2007, but there are a lot of challenges in ’08 and choppy general markets, so it depends a lot on how IPOs that went off in ’07 do,” says Mr. Lee.

He points out that local public offerings such as Bridgewater’s December outing have “yet to attract a lot of attention,” but could encourage more small deals of its ilk this year if they are seen to be well-executed.

Mr. Ford says it’s a rough market for public offerings these days with many regulatory issues to consider, meaning that mergers and acquisitions are “usually the preferred route,” although desperate times may call for desperate measures.

“The lack of venture capital may encourage a lot of these small IPOs, as companies take their destiny into their own hands and list themselves on the exchanges,” says Mr. Ford, noting that missteps “can be fatal,” referring to small public companies such as Liponex which saw its share price take a nosedive on disappointing test results.

“If (these public companies) can continue to grow, it’ll be fine, and it’s a better situation than trying to find an early acquisition or trying to grow on revenues alone.”

Nonetheless, Jeffrey Dale of the Ottawa Centre for Research and Innovation is positive that Ottawa’s tech sector will be able to work on the challenges it’s facing, despite the lack of VC financing.

“We’ve seen three IPOs – DragonWave, Espial and Bridgewater – in 2007 and the TSX is currently working with eight companies locally which are looking to have an IPO event soon,” he says. “It’s one of the most active markets for IPOs outside of the mining and energy sector in Canada right now, and (investors) are extremely happy with what they’re seeing Ottawa.”

Mr. Dale adds that the interest in the latest bright star – clean tech – ought to bring investment into the city, an opinion that Mr. Ford shares.

“We’re watching where the money is going and it’s starting to go to clean tech in record numbers; with the national policy around green energy and general environmental issues defined in a couple of years, there will be a lot of spending growth from government and businesses around clean tech, energy and conservation, and there will be tremendous return on investment with the right technology. It’s the most exciting thing I see for the future,” Mr. Ford says.

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