Wednesday, October 04, 2006

Technology Buyouts: Can they revive Canada's technology sector?

The young but remarkably fast growing technology buyout market in the US has yet to make its way here, and I wonder whether it will. In theory, the technology buyout (a emerging offspring of the traditional leveraged buyout model) could be the tool that helps revive a fragmented technology industry and creates the next Canadian technology giant. But will the shoe fit?

A technology buyout allows a undervalued or thinly traded publicly-traded technology company (often dubbed "fallen angels") to leverage its assets to raise enough capital to buy out existing stakeholders and take the company private. Once out of the public arena, the Company can cut costs (public company reporting requirements and compliance costs are generally estimated to be US $1 million - $3 million a year). With meeting quarterly targets no longer a focus, management then can focus on long-term value creation (new product development, strategic transformation). Management is also awarded a far more significant stake in the private company - 20% is an oft-cited number - than it would have enjoyed in the public markets.

A private software company with significant financial sponsorship also can drive much-needed consolidation for fragmented market segments by acquiring smaller players. SSA, Infor and Concerto are great examples of how private equity firms can use buyouts to drive consolidation.

How would technology buyouts play out in Canada? The major US players - Silver Lake, Sumit Partners, General Atlantic, for example - likely would find the opportunities here too small. Until this spring, I had been watching Cybermation, a Toronto-based provider of IT Workload Automation software, as a possible candidate for a consolidation play. A private company in an exploding space that is populated with small, venture backed players, I figured some public company would roll it into a larger strategy. I was only half right; in late spring CA bought the whole thing.

Next month, Insight is hosting a conference here in Toronto about private equity in general and buyouts in particular. Unless somethign changes, I'm thinking it's more of a breakfast get-together than a two-day event.

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