Silicon Valley North #24 October, 2000

The Way I See It… by Michael C. Volker

An Acquisition May be an Appealing Alternative

In my previous column, I talked about junior technology companies going public through a reverse-takeover (RTO) transaction as an alternative to raising traditional venture capital. In these deals, the founders usually end up being in control of a nascent small-cap public company with all of its inherent challenges.

Another, perhaps better, approach would be to consider a similar transaction, but without the "R" in RTO. Being acquired by a more mature, already public, corporation can provide the founding team not only with capital and stock liquidity, but also the market and management strength that a more established firm can provide. It means that the founders don't need to fuss with public markets and corporate governance issues distracting them from their core competency.

Lately, news about acquisitions has been dominating the press. Silicon Valley companies, in particular, are keen on Canadian targets. They recognize the value - not just in the technology but more importantly, in the talent which they're acquiring. Sellers are enjoying generous valuations.

I had an interesting discussion last week with a CEO of a NASDAQ listed Silicon Valley software company. 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. 

Cisco Systems Inc. knows this. It is buying PixStream Inc., a Waterloo, Ont. maker of products that speed delivery of digital video over high-speed networks, for about US$554 million in stock. This is Cisco's 17th acquisition this year against a stated goal of adding 20-25 companies to its stable. As a side benefit, Cisco believes that this will strengthen its connection with the University of Waterloo.

Redback Networks of Sunnyvale announced plans to acquire Burnaby, B.C. start-up Abatis Systems for US$636 million in order to build Internet-based services. Two other B.C. firms, Workfire Development Corp of Kelowna, was acquired for US$80 million by Packeteer Inc. and Richmond-based Top Producer Systems Inc was sold to Homestore.com for US$35.96 million in an all-stock deal.

A good example of a lower-profile acquisition is that of AeroInfo Systems Inc. The Boeing Co., as part of its expansion into computerized maintenance services, recently acquired AeroInfo, a privately-held 14-person firm based in Richmond, B.C. for an undisclosed amount

Unlike traditional industries, acquisitions in high tech generally mean selling up - not out, i.e. the founders of the company being acquired stay with, and become, a key part of the acquisitor's team. A good example of this is HotHaus Technologies Inc was acquired last summer by Broadcom Corp for US$280 million. Electronic Art's acquisition of Distinctive Software back in 1991 for $13 million is a further testimonial of this, now contributing 40% of EA's revenues. Distinctive's founder, Don Mattrick, is President of EA worldwide studios.

Joining an American parent makes a lot of sense for companies seeking to strengthen their marketing efforts in the U.S. However, there are lots of Canadian companies looking for acquisitions.

For example, Ottawa computer chip-maker Tundra Semiconductor Corp. is buying Quadic Systems Inc. of South Portland, Maine in a US$45 million, mainly stock, deal. Nortel, known for gobbling up U.S. firms, just acquired Toronto based Architel Systems for U$400 million and tiny Sonoma Systems of California for U$540 million.

For companies unsure of how to tap into this trend, there are specialized advisory services companies, such as the Corum Group of Seattle, which works exclusively with software companies interested in being acquired. Corum's recent tombstone announcements include lesser known Canadian firms like Cipher Systems and AccuMap EnerData Corp of Calgary both of which have been successfully acquired.

The way I see it, an acquisition by a complementary company may beat out all the other options for raising equity capital, getting liquidity and realizing one's dream.

Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and is chair of the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.