Q-News
September 2010
Posted in Mike's Commentary
Q1 Capital’s newsletter and my commentary are a little
later than usual this month as we’ve been quite busy with a number of mandates
on both the sell and buy-side. Plus,
with Labor Day falling on September 6 this year, it was hard not to resist the
temptation of getting in some last minute golf with clients at Coppinwood.
M&A activity in Canada picked up momentum in the
second quarter with Financial Post
Crosbie: Merger & Acquisitions in Canada reporting that Q2 deal values
improved 44% over the first quarter of 2010.
During the quarter there were 255 announced transactions valued at $34.8
billion compared to 258 transactions for $241 billion in Q1. Certainly from our perspective the important
metric is that for the first six months of the year there were 336 transactions
reported in the $5 million to $100 million range for just over $9 billion
(average of $26.9 million) compared to the comparable period in 2009 where 244
transactions were reported for $5.4 billion (average $22 million). Anecdotally, we are receiving a substantial
increase in incoming calls from US
Private Equity firms looking to make Canadian acquisitions and asking us to help
them make inroads in the Canadian market.
Amusing article of the month - The Digital 100: The World’s
Most Valuable Startups. Many of you will find this ranking and accompanying
valuations very entertaining. Far be it for me to give Henry Blodget
and his bloggers at Silicon Alley
Insider advice on how to promote technology companies (wasn’t he once the
master of doing just that?) but come on, can anyone really believe that Adenyo is worth 8 times revenues or $200
million? For goodness sake, even Motricity (a claimed market leader in the
mobile space) is valued at just under 4 times revenues and that’s after
completing a June IPO in which “sophisticated” investors were strong-armed by Goldman
Sachs and JP Morgan to ante up $50 million for a once touted $250 million IPO. By the way, the IPO was priced at $10.00 and
the shares fell to a low of $6.55 before moving miraculously from $9.00 to
$12.60 during the past 5 days. I’ll bet
someone let the cat out of the bag!
I readily admit that I don’t know Tyler Nelson (although I
have heard excellent things about him), don’t have intimate knowledge of Adenyo’s
business since he took over, rebranded and set new direction for the former Silverback
Media, and I do not have an agenda or any issues with a real company getting a
“real valuation”. In fact, for strictly
business reasons I would love to see Canadian mobile software/application/platform
companies trade at significant multiples.
To Adenyo’s credit they did manage to raise $26.9 million during a tough
period (congrats to Sanjiv at Canaccord Genuity) while pointing to a number of
market leaders in the mobile marketing and advertising industry in order to get
what I can only guess was an excellent valuation. Silicon Valley Insider claims that they are
looking at common stock valuation – the price the public might put on a company
- but it’s been a long time since I have come across sophisticated investors
willing to pay 8X revenues for a company.
How do you make money when you invest at that price?
Let’s hope that SAI’s valuation skills work out better
than they did for NING. In 2009, they ranked NING at number 26 on the
Digital 100 with a valuation of $500 million on revenues of $10 million. This year, with the replacement of NING’s CEO,
a change in business model that forced freemium customers to move to a premium service
or have their account closed, and cutting 40% of its staff SAI has revised its
valuation down to $200 million!
For those of you with long memories, one of the companies
that attracted plenty of Canadian interest and dollars during the internet
bubble was Digital Renaissance, later renamed ExtendMedia. Founded in 1992 by Keith Kocho as an
interactive media company focused on the integration of television and the
internet, ExtendMedia raised almost $26 million in 1999 from Canadian
institutions and multiple rounds of follow-on equity and debt from such
Canadian stalwarts as Bell Globemedia , Alliance Atlantis Communications and MWI
& Partners (a merchant banking arm of Midland Walwyn) and one time US
high-flyer Liberate
Technologies. While prospects for
the Company initially looked bright, it was never capable of living up to
expectations and in mid-2006 the Company moved its head office to Boston as part of a US$8
million raise with Atlas Ventures and Venrock Associates at a pre-money value
of approximately US$5.8 million.
Management also refocused the business on Content Management Systems to
manage the entire lifecycle of video content through monetization for pay media
and ad-supported business models. Last
month, Cisco acquired Extendmedia and issued a press release stating that
Extendmedia’s video CMS will be a core component of Cisco’s next generation
video architecture. Despite feeling
badly for the multitude of investors who lost money on Extendmedia, I would
like to congratulate Keith and his Toronto-based employees for their
persistence through many years of challenges and uncertainty.
Congratulations to Covington Capital for winning this
year’s CVCA “Deal of the Year” for its investment in SXC Health Solutions Inc. Covington initially invested in March 2001
and exited in July 2010 with SXC generating revenues of $1.9 billion and a
resultant nine year investment generating an internal rate of return of 38.7%
and a multiple of 13.3 times original investment. Kudos to Phil Reddon and in particular Jeff
Park, who moved over from Covington
to become the CFO of SXC.
On another quick note, it’s great to see Google acquiring SocialDeck, another Waterloo company. It’s also interesting to note that SocialDeck
was financed by Blackberry Partners Fund in March 2009
I would be remiss if I didn’t remind you of the upcoming
December 7th Canadian
Innovation Exchange at the MaRS Discovery District. The event is going to be a gathering of the
key players in the innovation economy and a showcase for many of the great
technology-based companies coming out of Canada.
Finally, David Crow, Microsoft’s best evangelist for early
stage Canadian technology companies has left MSFT to get back in the trenches and
start a new Canadian software company.
David’s going to be missed in the role that he played but I’m sure that
all of us who know him wish him the best with his new venture and look forward
to what I suspect will be a torrent of unfettered commentary.
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