Tech Futures:
June 2, 2000
By Michael
Volker
Aquisitions, IPO Watch, Capital Pool Corps
Demystified, Events & Footnotes
The last word in my last column was to keep an
eye on Pivotal Corp (NASDAQ:PVTL). I made this comment in light of a
rumour I heard regarding a local acquisition.
Sure enough, two days ago Pivotal announced
that it was acquiring Simba Digital Conversions, a division of Simba
Technologies Inc. of Vancouver.
Interestingly, on the day of the announcement
(the announcement was made in the early morning), the stock dropped more than
four dollars. Yesterday, it bounced back up by more than six dollars to close at
US$25.44 and in early morning trading today it's up to $28. Leading up to the
announcement, the stock was holding steady around $22.50.
Simba Digital Conversations is a developer of eMarketing solutions and is
working on a new generation of business-to-business Web sites.
Pivotal will be issuing approximately 550,000 shares of common stock to the
holders of securities of Simba Digital Conversations. This will only add some
$14 million to Pivotal's market cap of $514 million - less than what gets added
as employees exercise stock options. Since talent is so hard to find these days,
I would think that just the added intellectual capacity alone justifies the
price.
Frankly, I read their news release but it has
so many e-buzzwords and i-speak that I challenge the lay person to understand
what's going on. I sure couldn't. Hence, my conclusion above. Maybe the PR folks
could translate it all for us someday.
Another acquisition of a BC privco by a BC
pubco - this time a more junior pubco - was announced earlier this month. Immune
Network Research Ltd. (CDNX: IMM) announced that it plans to acquire up to a
two-thirds controlling interest in BC Research Inc. ("BCR",
www.bcresearch.com), a leading BC based technology innovation incubator.
Dr. Hugh Wynne-Edwards, President, and a major
shareholder of BCR, has agreed to tender his current holdings and extend his
support to remaining shareholders for Immune Network's acquisition of a majority
interest. NORAM Engineering and Constructors Ltd., another major
shareholder, will maintain its current holding in BCR.
Dr. Allen Bain, CEO of Immune Network and Dr.
Wynne-Edwards wish "to create an alliance which will accelerate the growth
of British Columbia's and Canada's new technology economy."
BCR has approximately 100 employees producing
$7 million in annual revenues. BCR also runs the BC Research and Innovation
Complex (located on 10 acres at the University of B.C.) in which there are 370
people working in 22 high-tech companies, including including Nortran
Pharmaceuticals Inc. (CDNX:NRT) Inc., and Micrologix Biotech Inc. (TSE:MBI).
A biotechnology cluster has developed at the
Complex based on strong relationships between the biotech companies and the
University of BC.
BCR shareholders who accept Immune Network's
exempt take-over bid offer will receive, on the closing date, one common share
of Immune Network for every BCR share tendered. Within 18 months of the closing
date, such BCR
shareholders shall receive additional Immune Network common shares on the basis
of one dollar's worth of Immune Network's common shares for each BCR share
tendered if payment is made within 12 months of the closing date, or one dollar
and twenty-five cents' worth of Immune Network common shares for every BCR share
tendered if payment is made after the first anniversary of
the closing date.
Trading in the $.70+ range from a 52-week high
of $3.70, with a market cap of $21 million, IMM should appeal to the more
adventuresome investor.
IPO Watch
On the IPO (Initial Public Offering) front, it
looks like one of BC's first and best known tech firms, MacDonald Dettwiler and
Associates (MDA) will be making a public distribution of shares this summer. The
offering will be for approximately $160 million some of which will be from the
treasury and some from selling shareholders (likely some VC's looking for their
"exit").
MDA, which was formed by John MacDonald and
Verne Dettwiler (UBC grads) way back in 1969, now employs some 1700 people. MDA
calls itself an information company and is moving into the internet e-commerce
space selling information, maps, and satellite images. MDA is better known for
its space robotics subsidiary which produced the Canadarm for NASA's space
shuttles.
MDA was a public company once before. It was
listed on the Vancouver Stock Exchange for a few years until it was acquired by
U.S. based Orbital Sciences Corp in 1995 for a mere $86 million. Last year
Orbital sold a third of MDA to Canadian investors for $112 million. Nice going,
Orbital (where were the Canadians?).
MDA is profitable. $12.9 million in earnings on
revenue of $298 million was reported last year, approximately double that of the
prior year.
After the IPO, Orbital will still be in a
control position. However, the company will be run by a Canadian Board.
If you'd like to get in on the IPO, call one of
the underwriters: RBC Dominion, Scotia Capital, TD Securities, CIBC World
markets, or Goepel McDermid.
Capital Pool Companies Demystified
Just over a year ago, I dedicated a column to
explain the Vancouver Stock Exchange's Venture Capital Pool (VCP) program.
As part of the creation of the Canadian Venture
Exchange (CDNX), the VCP program merged with Alberta's counterpart - the Junior
Capital Pool (JCP) - to produce the Capital Pool Corporation (CPC).
In the almost two years since VCPs were introduced, more than 100 VCP/CPC
companies have been created.
I've been a big fan of these. Why? because
they:
- are a great way for smaller investors to
play venture capitalist and get in early
- give protection to investors against stock
"flippers" (e.g. via stock escrow provisions)
- provide young technology companies with
startup funding (giving traditional VC's some competition)
- can provide an instant "board" and
mentors to young companies
- may offer access to subsequent financing
- may be able to attract employees (e.g. with
pubco stock options) more easily
- off-load the due diligence process from
brokers to experienced industry people
- offer a less risky and costly route for
companies to go public
- are superior to RTOs (Reverse TakeOvers)
insofar as the shell and its people are fresh and "clean"
So what exactly are CPCs and how do they work?
A CPC is a public company which has been
established for the sole purpose of acquiring an active business enterprise. It
allows a group of individuals to create a vehicle - i.e. an "empty"
public company with no assets other than a little cash and an eager board of
directors - which they can then use to finance and build an emerging venture.
Unlike a dormant "shell" company, a CPC brings with it a wealth of
experience through its directors. A CPC's sole purpose in life is to acquire a
business and then trade as a normal venture company on the CDNX.
In the CDNX's own words, "The
Exchange’s program was designed as a corporate finance vehicle to provide
businesses with an opportunity to obtain financing earlier in their development
than might be possible with a regular initial public offering (“IPO”).
The CPC program permits an IPO to be conducted and an Exchange listing to
be achieved by a newly created company which, other than cash, has no assets and
has no business or operations. The
CPC then uses this pool of funds to identify and evaluate assets or businesses
which, when acquired, qualify the CPC for listing as a regular Tier 1 or Tier 2
Issuer on the Exchange (a “Qualifying Transaction”)."
A common misconception about
CPCs, is that they are indeed a "capital pool" or a type of venture
capital fund. As stated above by the Exchange, the pool of funds is used to find
a target company - not invest in the company. In fact, the absolute
maximum cash limit that can be raised is limited to $700,000. Very few CPCs
raise the maximum.
The working capital needs of
the active technology venture which will be acquired by the CPC will be met by
having the principals of the CPC and/or the underwriting sponsor raise the
capital via private placement or public offerings coincident with the completion
of the acquisition.
In essence the process is
very similar to that of an RTO, i.e. Reverse Take Over, because the principals
of the CPC no longer control the merged entity. In fact, the principals of the
target company end up in control. For example, a CPC with 3 million shares
outstanding can acquire an active technology enterprise by issuing 7 million new
treasury shares to the owners of the target company. Now, the CPC founders and
all the public shareholders will own 30% of the company while the new
shareholders (the former target company owners) will hold 70%.
The way this works is
simple. Here's an example: The CPC team finds an exciting young company, call it
BlueCo, in the internet telecoms sector. BlueCo has some unique IP (intellectual
property - not internet protocol although it uses that, too) with patents, a
dozen solid engineers, a good business plan and some enthusiastic prospective
customers. The CPC folks and the BlueCo folks negotiate hard and finally agree
that BlueCo is worth $7 million dollars. CPC shares happen to be trading around
$1 per share. Hence, the CPC issues 7 million treasury shares to buy BlueCo. At
the same time, the CPC team with its sponsor agrees to raise another $2 million
at $1/share via private placements. New investors are more readily
attracted at this stage because they are investing in a stronger company.
A couple of important points
to note: the resulting merged company must still meet the minimum listing
standards required by the CDNX, i.e. you can't acquire a flaky company with no
substance. Also, the "majority of the minority", i.e. the arms-length
public shareholders, must approve the acquisition of the target company. And
there are guidelines as to what constitutes a "qualifying transaction"
(e.g. CPC must issue at least 25% new shares, i.e. acquire significant assets).
How does a CPC get started
in the first instance? A group of individuals, for example a small group of high
tech business angels, decide to incorporate a CPC. Their first step is to find a
sponsor - a stock broker who will sponsor them on the CDNX Exchange by agreeing
to handle an IPO (Initial Public Offering). The founding group must invest a
minimum of $100,000 (total) in "seed" capital in the company at a
price of at least $0.075 per share. They then hire an accountant to produce a
nice, fresh audited balance sheet (which shows the seed capital amount
and the number of shares issued). They also sign up a transfer agent (all pubcos
use a transfer agent to keep track of who owns shares). Finally, a corporate
securities lawyer is engaged to prepare a prospectus document. This document is
mainly "boiler plate" other than information about the CPC team
members - who they are what they've done, etc. The document must state
that: a) the CPC
does not have business operations or assets other than cash; b) the CPC has not
entered into an agreement in principle with any company; and c) the offering is
suitable only for those investors who are willing to rely solely on the
management of the CPC and who can afford to lose all of their investment. The
prospectus also states how many shares are being offered to the public and the
price per share.
Getting all this done takes
little time and money. Total legal and accounting costs should not be much more
than $10K. The prospectus is then filed with the CDNX for approval. Following
what are usually minor revisions, the broker then gets a green light to sell
shares in the CPC to the general public. Regarding approvals, what the CDNX
looks for is the quality and expertise of the CPC's founders. They want to make
sure that these people have some understanding of the public markets, will apply
good corporate governance practices, and most importantly do not have tarnished
reputations (no room for scam artists, here!).
Brokers' clients just love
to buy shares like this on the IPO. This is because the maximum price
that shares can be offered at is $0.30. And, there are usually only slightly
more than 1 million shares offered, which is the minimum number of shares
than can be offered to a minimum of 300 shareholders. Because of this,
the price nearly always (I've seen no exceptions, yet) doubles or triples as
soon as the stock starts to trade in the market.
Upon completion of the IPO,
the CPC will typically have somewhere between $300K and $700K in the bank which
it will then use to identify potential acquisitions, like BlueCo above.
In principal, CPCs should
not have pre-determined deals in mind. Although Albertans have allowed JPCs
(under the old Alberta Stock Exchange rules) to be formed by individuals as an
alternative way of taking a company public (rather than doing an IPO directly
for the target company), British Columbia has frowned on this practice.
To recap, the following
table summarizes some of the basic features of a CPC:
| Seed Share Price: |
$0.075 to $0.15 per share |
| Min. Seed Capital: |
$100,000 |
| IPO Share Price: |
$.15 to $.30
(2X Seed Price max) |
| Min. # Shareholders: |
300 |
| Min. # IPO shares: |
1,000,000 |
| Max. post-IPO capital: |
$700,000 |
| Founders shares: |
1,000,000 to 2,000,000 |
| Public float: |
1,000,000 to 2,000,000 |
| Total shares after IPO: |
2,000,000 to 4,000,000 |
Who can form CPCs? Anyone
anywhere can form one. It used to be necessary to have at least one Canadian
(including an Albertan or a British Columbian) on the board. But now, that's no
longer necessary. CPCs need not be incorporated under BC, Alberta, or Canada
laws. They could be incorporated off-shore or in jurisdictions like the Yukon
where Canadian residents are not required on the Board.
One little quirk about our
strange system of securities regulation in Canada is that presently, IPOs for
CPCs can only be offered to B.C. and/or Alberta residents (aren't you glad
you're a westerner?). Of course, once they start to trade, anyone anywhere can
buy/sell.
When I lived in Ontario, I started two JCPs in
Alberta. I had to have at least one Albertan on the board of each JCP. But when
the IPO was done, only Albertans good buy it. None of my Ontario pals could.
This is still the case today and typically when a CPC goes public its shares are
offered in either Alberta or B.C. Ontarians -eat you hearts out. Soon, though,
the CDNX will get the Ontario Securities Commission to go along with the
program. If only we had a national, unified securities commission!!
In my opinion, there are some compelling
reasons why CPCs are useful. Companies seeking to do an IPO on a junior exchange
need to have a sponsoring broker. This broker, like a venture capitalist, is
supposed to do the due diligence on the company on behalf of the investing
public. This takes time and knowledge. Before even approaching a broker,
companies must have raised a certain amount of seed capital, have a good
management team in place and have an exciting opportunity. But, even for
companies that satisfy these requirements, the overhead cost and time taken to
do an IPO is still somewhat intimidating. Junior IPOs are not attractive to
brokers. A broker can make more money by trading and doing financings for
already-listed companies than by investing tons of time and effort in an IPO.
Enter the CPC. The CPC is already a trading entity. As such, it has some cash on
hand, the potential to raise more cash, and a board of directors that knows
something about public markets, finance, and building successful companies. By
putting a CPC together with a technology company, even if it doesn't meet all
the IPO criteria on its own, presto - you've got the makings of a better deal.
The CPC directors effectively off-load the brokers by doing the legwork and
putting their own reputations on the line to ensure that good deals get done.
The process of finding a suitable acquisition
candidate can take several months. The CDNX has put a time limit of 18 months on
this process to ensure that the CPC directors are proactive. When a candidate
acquisition has been identified a tentative deal, referred to as a
"Qualifying Transaction", is negotiated and this is then submitted to
the Exchange for approval.
To make sure that a CPC's insiders aren't in
this for a quick flip, the founders have to escrow their shares for 3 years!
(shares get released in 6 month intervals). And, the counting on the escrow
releases doesn't even start until after the Qualifying Transaction has been
completed.
It is worth mentioning that CPCs are reviewed
and approved by the Exchange (not the B.C. or Alberta Securities Commissions as
in the past) which has set strict performance standards for itself (e.g. getting
CPC prospectuses approved within 25 days).
One problem with CPCs for investors is that it
is difficult to get stock on the initial public offering (IPO). This is because
the stock has to be widely distributed to at least 300 shareholders and the
number of shares being offered is small, i.e. in the one to two million range.
This means that a purchaser can only buy, on average, a few thousand shares.
However, when the stock begins to trade, buyers of the IPO can buy more shares
on the open market. Demand has been high.
Why would anyone invest in a company if it
can't tell you what business its going to get into? The answer is to look at the
board of directors. This will give you some hints. As for getting in at the IPO
stage, the best bet is to call your broker(s). This is one case where you really
do need a broker - internet trading won't help you here. You're going to have to
cozy up to a real live person and get them to notify you when they have an IPO
in the pipeline. For those of you who have used full service brokerage firms and
have avoided the discounters, here's your chance to call them up and get some
preferential treatment for the loyalty you've shown over the years.
I've been keeping an eye on CPC activity on the
CDNX (as well as VCPs before that) and in the following section you'll find a
regularly updated table listing all CPCs. To get a copy of the prospectus
document for any of these ventures, just look up the company on the Canadian
securities administrators' information repository - SEDAR - at http://www.sedar.com.
When you look at the chart you may wonder why
there are so many (more than 100) CPC's in the works and relatively few
consummated deals. Only 10 CPCs have made the transition. I can give you some
insights into this. Firstly, I have found that CPC boards take their role
seriously. They are less likely to do a quick and sloppy deal. They have to live
with it and make it work. They get no fast pay cheques and capital gains. I'm
presently involved in two CPCs and I've invested in several others and I can
tell you that the task of finding just the right takeover target can be a very
onerous job. Like a marriage, there's got to be a good fit. The parties have to
be able to work together and most important of all, everyone has to believe that
the business opportunity is real.
One of the most challenging an interesting
aspects of the CPC process is that of determining the relative values of the CPC
and its target company. What's a fair price to put on the target? How many
shares of the CPC should be issued to the target's owners? In the case of the
CPC, the valuation is straightforward: the market dictates. If you've got 3
million shares trading at $.50, your value is $1.5 million. But, because the
target company is private, the value has to be negotiated.
Those who are familiar with RTOs will often be
of the opinion that CPCs are overvalued. As per the above example, why should a
company with only $500K in the bank, with no active business, be worth a few
million dollars? Like a dot-com which is selling a future hope, the CPC is
selling itself as a vehicle which has the potential of contributing
substantially (expertise, contacts, mentoring, credibility, access to capital,
etc) to the growth and development of the target company.
Finally, please note that there are many
details which I have not mentioned here. And the rules do tend to change and get
updated. For a thorough description of this program and to get a copy of the
policy please go to the CDNX website at www.cdnx.ca
and look up Policy 2.4: Capital Pool Companies. Have fun!
Capital Pool Corporation (CPC) Update
In this column, I keep track of Capital Pool
Corporation ("CPC") companies (see chart below) as defined by the
former CDNX because they may provide funding 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 less than $1.00. And when it does what is expected,
you can reap a nice reward. On average, CPC share prices have appreciated over
200% from their IPO pricing. The real money, though, will be made once they
complete their acquisitions of real operating companies.
Since the May 19th update, new CPC additions
to the list are Babylon Technologies
Inc., CSW Ventures Corp.,
EKZ Investments Ltd., Intercedent Ventures Ltd., and New Xavier Capital
Corp.
Babylon Technologies originates from Quebec, CSW Ventures originates from
Ontario, and EKZ Investments originates from Alberta.
The following companies have now come to trade:
Brisbane Capital and Healy Capital.
Ayers Capital and Empress Capital have
been deleted from the list because they have completed their respective
Qualifying Transactions.
Check our
Venture Capital
Pool chart for a complete updated list of the CDNX's CPC and VCP companies,
thanks to David Ing of Pacific International Securities.
Upcoming Events
At its May 23rd event, the Vancouver Enterprise
Forum featured Rory Holland (of Itemus, formerly Vengold - one of BC's
internet incubators) and three local CEOs speaking on the subject of CEO War
Stories. We heard about the Good, the Bad, and the Ugly from Ian Wilkinson,
CEO of Radical Entertainment, Rick Moignard, CEO of Chancery
Software and Greg Kerfoot, President of Seagate Software. Of
these, I'll bet that Chancery's a good IPO bet.
Synopsis: as a CEO you'll always make some
mistakes. In fact, if you're not making any, you may not be stretching yourself
enough. Most CEOs (like these) are just ordinary folks, but they sure do have
tenacity. They won't take "no" for an answer. Other lessons: People
are the most important part of a business, don't burn any bridges, and make sure
you communicate with your customers and investors. Check the VEF website for
more comments
from some of the students who attended this event.
The annual dinner event on June 27th will
feature Jim Yeates, CEO of Burntsand Inc (TSE:BRT) as the keynote
speaker.
Information on these events may be found
on-line at http://www.vef.org.
Footnotes
Brent Holliday raised a question in one of his
recent columns about Quebec's deal with the NASDAQ exchange to open shop
in Quebec. This is a tough one to figure out. I can't for the life of me figure
out NASDAQ's motive behind this. Quebec's motive, obviously political, is clear.
If anything, this may give the TSE a little competition insofar as Canadian tech
companies generally favor the NASDAQ over the TSE. Going the Quebec route was
likely an easier entry for NASDAQ into Canada (not that they need it).
When I searched the web for more details on
this detail, I could find very little. A search on NASDAQ's site produced a zero
result on the Quebec keyword! That should tell you something about how keen they
are.
As for CDNX - pas de probleme. CDNX has
different listing criteria catering to junior (micro-cap) companies and it is a
feeder, not a competitor, to NASDAQ.
I think it would make a lot of sense for the
folks in Ontario and the TSE to cozy up to the CDNX a little more. For example,
an open door to the TSE for CDNX companies might send some business to the TSE
rather than bypassing it and going straight to NASDAQ.
What a surprise the NASDAQ folks got when they
found out that they had to learn to speak (maybe even trade in) French. They
probably assumed that Quebec would waive the French language requirement. Mais,
non! Domage! Who knows maybe the French will start trading on NASDAQ
(where the Q=Quebec). Formidable!
I received lots of feedback on my column
last week on stock options. A number of CEOs were concerned that I was
blasting one of the few lucrative tools which they have at their disposal to
attract foreign talent to their companies.
Like I said in the column, I like options but
you have to use them carefully. Theoretically, they work fine - especially when
prices keep increasing. Practically, they don't work that well when prices are
volatile. I'd like to emphasize that one way they will work is if they are
regarded strictly as incentive compensation - not as a way to get employees to
invest (that is better done with a well structured ESOP - Employee Stock
Ownership Plan). At least that's RevCan's view (I still use RevCan instead of
Canada Customs and Revenue Agency - oh why oh why did they ever change their
name? Brand recognition, eh?). So if you are an employee and you get options -
when you're in the money, exercise and sell all your options. Then take
your proceeds and re-invest some of them (but remember to keep enough in reserve
to pay the tax).
As for my dilution concerns as an investor, I
would encourage directors of companies to limit stock option plans to a maximum
of 15% of issued capital and to allow for at least a three year rotation with
annual vesting arrangements in place.
Annual vesting will ensure that employees who get options do indeed add value.
When I voiced concerns about "market cap creep" I was not implying
that new recruits who get options don't add any value for the shareholders (to
warrant the increase in capitalization).
By the way, "market cap creep" is not
a stock analyst who is bearish on your company's prospects!
Speaking of creeps, it looks like the tech
markets, notably NASDAQ, are creeping upwards again. As we saw a few months ago,
strong markets create a positive investment climate for emerging companies -
public and private - and bullish signs are always welcome for our sector.
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
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