July 25th, 2002
gonna run to you,
Cause when the feelin's right,
I'm gonna run all night,
I'm gonna run to you" - Bryan Adams, Run To You
summer is never slow for news. You'd think that people
would just kick back, relax and wait for September. They
do it in Europe, don't they? Apparently not. At least
not in Paris, France near the Place Georges Pompidou.
Home of Business Objects SA, a $500M a year business
software maker. The new headquarters for Crystal
Decisions, bought last week for US$300M in cash and
roughly US$520M in stock.
happened? Where did the bellwether IPO (initial public
offering) go? Why isn't Crystal Decisions its own
company with a fresh US$170M in its jeans ready to take
on the world and make its new public shareholders happy?
Why did our local success story, organically grown in
Vancouver to 1,700 employees and over US$200M in revenue
decide to become a branch office for its slightly larger
want to answer those questions as well as explore a
broader question for all of us in the early stage
technology business: Is the IPO on NASDAQ the real goal?
For years people like me have been telling people like
you that the true measure of success for a really big
idea and the culmination of years of value creation is
the IPO where all shareholders benefit. They benefit
through liquidity for their stock (options or actual
shares) and the access to the cheapest available capital
to grow the business further, public equity.
have all heard the stories. Sequoia Capital owned 50% of
Cisco after its first round of venture financing. On an
"as if held" basis, their original stock,
split adjusted, would be worth US$20B today. So they
invested $5M and if they didn't sell their stock until
now they would have made 4000 times their money. Wealth
creation through equity ownership can be staggering (as
can the losses as we saw too often in the past few
years). And the public markets, the most efficient of
which are the big US ones, can turn your paper gains
into real cash.
So why did Crystal bail?
of the more outlandish ideas was from Jim Cramer,
founder of thestreet.com and host of CNBC's Kudlow &
Cramer: Crystal Decisions executives found the idea of
being public in the USA one year after Sarbanes-Oxley
became law as nearly intolerable. He argued that the
scrutiny by the SEC and the accounting oversight board
is too much for a smallish company to bear. Sure it is
tougher to be a public company on a US Exchange these
days, but I'm pretty sure that Jim's reason is a very
small part of the overall set of circumstances that led
to the IPO punt.
Decisions shareholders simply took the bird in the hand.
I don't think they were nervous about how the IPO would
do. They were presented with an offer that gave them
cash right now, which they would not have received for
at least one year (the holding period for insiders on
IPOs). The stock in Business Objects is freely trading
already and because they are not insiders, they can sell
that stock in 45 to 90 days. Also, the total price paid
was at least $200M more than the pre-IPO price (before
the shares are issued for the US$172M raised), so the
premium was there. They probably debated it for all of
of the employees you ask? Their options are likely
converted to Business Objects pricing and option plan
and not vested. That's what I would do if I wanted to
grow the company and take on the industry leaders.
back to the IPO idea in general, is it really all its
cracked up to be anymore? And even if it is still the
ideal end game for a founder and early shareholders, is
it a pipe dream for companies in BC to think they will
follow QLT, Ballard, Creo, PMC-Sierra and others to the
IPO holy land?
look at Crystal again. It has been over 18 years since
Terry Cunningham originally founded Crystal Services and
grew it from a handful of people to a few million in
sales. He was bought out by Seagate in 1994 and Seagate
Software grew through the mid and late 90's. But it was
an extremely long haul to US$200M in sales and an IPO.
It's even a very long time to a US$820M purchase, the
second largest private Canadian tech company acquisition
ever. Compare that to the (now) third largest
acquisition in July (see, the summer thing again) 2000,
Abatis Systems. It was less than 800 days from zero to
is their story). Certainly Abatis happened during
the bubble and we should be careful in comparing
all-stock deals (that ultimately became worth a lot
less) to the Crystal deal, which included cash.
today's market, an IPO candidate is a solid company with
tens of millions in sales and at least 4 quarters of
profit growing at a significant rate. That kind of
growth requires years of hard work and excellent
execution of a solid business plan. It requires
technical superiority and equally superior marketing and
sales skill. It also takes luck and luck involves good
timing. If all that falls into place for a company over
a period of years, an IPO can happen and a few from
Canada will do so. But if a company is doing well in its
early years, then it is more likely that an acquisition
offer comes along before they reach the size and
strength of an IPO candidate.
truth is that many of you out there will work or are
working for companies that will never be candidates for
the big IPO. I agree that this is not a
bad thing. There are many good reasons to stay private,
not the least of which is the increased scrutiny that
public companies undergo in today's post-Enron/Worldcom
world. A nice profitable private company can kick off
bonuses and dividends that make you a wealthy and happy
employee or owner. It ain't easy to reach that level,
but it is probably more likely than the big IPO.
the IPO a pipe dream even for those companies that dare
to be large players in big industries, like venture
capitalists want? I think you can look around and say
that the technology world has changed in 30 years and
the massive gorillas in certain sectors are defining the
"exit" opportunity for early stage technology
companies. Take the video game business, for instance.
Who can deny that Electronic Arts dominates and rather
than go head to head with their products and
distribution strength, it would be better to set
yourself up to be acquired? Many sub-sectors of the
technology industry are defined by the gorillas who will
try and eat the up and comers who might eat them if
allowed to grow past the IPO stage. In an area like
business intelligence, with no dominant gorilla yet,
Crystal Decisions gets together with Business Objects to
try and create one.
years ago, being acquired was a last resort for
liquidity for an early stage technology company. Now it
is the most likely successful return for investors and
shareholders. It is just getting too hard and too
unlikely for the company to grow to the IPO. We just saw
the most glaring evidence of that right here in our own
your sights on $100M or $1B in sales probably defines
your goal as a "big" one. That defines a big
company that an early investor, shareholder or employee
could make a handsome return on over time. The issue of
that return being in the form of IPO shares is
increasingly unlikely as the technology industry matures
and we don't appear to be in for an IPO frenzy like 1999
and 2000 for many, many years to come.
the decision for Crystal was no to the IPO. I believe it
will be some time before we see another get that close
here in BC. But we will see a lot of acquisitions that
make shareholders very happy and continue to grow our
industry. And that's not a bad thing.
- It's Raining Acquisitions -
Congratulations to the folks at West Bay Semiconductor
and Wavemakers, two companies that started around the
same time (1999ish) that worked hard for a few years and
made a return for their investors. No small feat at all
given the market that they both grew through. It is
another indication of things picking up in the market in
general and in BC in particular.
From Last Time –
Wow Brent! That was a pretty uplifting article. Can you
tell that Telecom exec that I too would like to live in
BC? The only thing holding me back has been my utter
inability to find a job!
What exactly is the provincial government doing to
jumpstart investment in the BC hi-tech sector? I pick up
magazines here and see ads for different regions trying
to promote themselves as hi-tech hubs (North Carolina,
Idaho, Ohio, even Ontario) I have yet to see a single
print ad or otherwise promoting BC as the place to
relocate your business or investment dollars. I also
note the lack of any follow-up about the Premier's
Hi-tech council. What are those people doing?
While I am as excited as the next person about the 2010
Olympics, I fail to see any link between that and the
tech industry. Unless I am printing t-shirts, postcards,
running a restaurant etc.. I really see no co-relation
between a sporting event and technology growth. As for
this making Vancouver a "World-Class" city - I
thought Expo 86 was supposed to put us on the map? When
did our little push-pin fall off? Oh by the way -
getting the Olympics was news in the US but mainly
because it was felt that it might have an impact on NY's
bid for the 2012 games. No one is devoting entire travel
sections in the paper to Vancouver.
I don't mean to be a whiner and I am certainly in
support of the Olympics. Let's just not get carried away
with our expectations for what this will do.
- What, you whine? Never. Getting the Olympics does not
instantly transform our economy. It takes time. But the
lift that the city gets on economic, social and
promotional levels from an event of this size and scope
is enormous… over time. So, no, your job is not
waiting here. But there will be more activity and
excitement going forward. If you can't find a job, maybe
you can make money on your real estate holdings here?
As for your points about the lack of promotion by BC and
specifically BC's tech sector, THAT'S EXACTLY WHAT I
HAVE BEEN SAYING FOR SIX YEARS IN THIS SPACE. We have a
tough time overcoming some stereotypes and
misinformation about BC, which is a subject for a new
column. Stay tuned.
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
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