Bay Street Stalemate: Buyouts Find Few Takers for Low-Ball Privatization Deals | Jobi Cool


Private equity firms have become increasingly interested in making tech buyouts in Canada, with many American companies politely expressing their interest to public companies.Nathan Denette/The Canadian Press

The pandemic fueled a boom in Canadian tech IPOs, but now, nearly a year after the market for IPOs closed, vendors are pitching the opposite.

Investment bankers who led a wave of Canadian tech IPOs in 2020 and 2021 have suggested to some of those same companies in recent months that they should consider going private again after their share prices collapsed.

“There are a lot of ideas going around and it’s not unusual for an investment banker to pitch ideas that involve public companies,” said Lisa Melchior, managing director at Toronto private equity firm Vertu Capital. “There are a few on that list because valuations look pretty good.”

Private equity firms, meanwhile, have become more interested in making tech buyouts in Canada, with many American companies politely expressing their interest to public companies.

“In the first half of the year, most private equity companies took the position of waiting to see where the market bottomed out. Now there are many more of these discussions,” said David Wismer, head of global technology investment and corporate banking at BMO Capital Markets. Private equity firms are “certainly now very willing to do business.”

But so far the deals are not happening in Canada because the gap between what the plaintiffs are willing to pay and what the CEOs and directors of these public companies believe they are worth is too wide. That has led to a stalemate and helps explain why the wave of privatizations predicted by market watchers last spring has not materialized. At least, that’s the view of 18 market participants – bankers, private equity investors, CEOs of public technology companies and consultants – interviewed by The Globe and Mail.


The Great Canadian Technology IPO Bust

Only four of the 20 tech companies that went public

TSX from July 2020 to November 2021 are trading

above their issue price.

% Change (return from IPO)

*Effective from January 2022, when the company was acquired by

CloudMD ** US price

the world and the post, Source:investing.com

The Great Canadian Technology IPO Bust

Only four of the 20 tech companies that went public

TSX from July 2020 to November 2021 are trading

above their issue price.

% Change (return from IPO)

*Effective from January 2022, when the company was acquired by

CloudMD ** US price

the world and the post, Source:investing.com

The Great Canadian Technology IPO Bust

Only four of the 20 tech companies that went public on the TSX from July, 2020, to November,

In 2021, trading is above the issue price.

% Change (return from IPO)

*Performance as of January 2022, when the company was acquired by CloudMD ** US prices

the world and the post, Source:investing.com

Most companies that went public in more buoyant markets have seen their shares fall 60 percent or more. Many still have plenty of their IPO cash and decent growth potential, and believe that even with the premiums that buyout companies would offer, they are grossly undervalued.

“We don’t need to raise money — the business is sustainable,” said Rob Laidlaw, CEO of Toronto-based VerticalScope Holdings Inc. FORA-T, a digital media company that went public at $22 per share in June, 2021, and closed Wednesday at $7.53.

He has heard from private equity firms, but said that even if VerticalScope received an offer at a 40 percent premium — a typical private equity offer — that would value the company at less than half its issue price. “Why would we do a deal that’s 50 percent below the IPO price?” It’s just not going to happen. We are not sellers at all.”

Market watchers say a handful of crippled, smaller public tech companies in Canada have voluntarily tested the waters for private deals, though none have reported formal processes. Neil Selfe, CEO of Toronto mergers and acquisitions advisory firm Infor Financial Group, said: “If you have good unit economics and a positive long-term outlook, today is probably the worst time in the last decade to consider selling your business.” .”

Interest in digital businesses surged after the start of the pandemic led people to communicate, work and do business from home in large numbers. That led to a rise in valuations and a rush to the public markets reminiscent of the dot-com bubble. After averaging one tech IPO a year from the financial crisis of 2008-09 to 2019, the Toronto Stock Exchange hosted 20 from July 2020 to November 2021. Strong investor demand for IPOs led to increases in rounds and bid prices. The valuation of several issuers reached $1 billion when trading began.

But the stocks of the “pandemic winners” came under pressure last year on concerns that their growth would slow. Rising inflation led to expectations that central banks would raise interest rates, which they did. Valuations for online software companies, which roughly doubled in 2020, fell in late 2021 and are now at their lowest in the nine-year period.

In the US, there have been several billion-dollar tech buyouts this year by private equity firms, including Thoma Bravo and Vista Equity Partners; the value of such deals is on track to top $118 billion by 2021, the highest since 2007, according to Pitchbook.

So far, there has been only one re-privatization among the 20 tech companies going public in 2020 and 2021: Telehealth company MindBeacon Holdings Inc. was acquired by CloudMD Software and Services DOC-X, a listed TSX Venture, for $4.78 per share – well below the $8 per share issue price. That deal was made last November, in the early days of the stock market.

Otherwise, “the gap between buyers and sellers has not narrowed” here, said Ed Bryant, CEO of Ottawa-based technology M&A consulting firm Sampford Advisors. “Everybody’s saying, ‘There’s an opportunity here,’ but nobody’s giving up yet.” I think it will happen. Maybe one domino falls and the others go.”

Several Canadian companies appear on the screens of bankers and private equity firms as potential targets. Drew Loucks, a managing director at Boston’s Great Hill Partners, said his firm is “particularly watching companies that have gone public in the last few years that are likely to be underperforming, have no real float, and may be candidates to take private.” There are companies on the TSX that meet these criteria.

One name that some say is particularly underrated is Vancouver online course host Thinkific Labs Inc. THNC-T. Its market capitalization is about $140 million, which is roughly equal to its June 30 cash holdings. “At the price of the stock today, there’s just no way we would do any kind of business,” said Thinkific CEO Greg Smith, whose shares have fallen. more than 85 percent from its $13 per share IPO price in April 2021. “Our best path forward is to prove that we can use our strong balance sheet to leverage and grow the business.”

For Mr. Smith, who has received several unsolicited offers to go private, it’s an easy choice to say no: He and brother Matthew have a majority voting control of Thinkific. “Obviously people would look at companies like us and say, ‘Wow, this is an amazing opportunity if we could get them to do something.’ But I look at it as, ‘This would be a terrible opportunity for us to do something on this price.”

Mr Loucks said he expected the impasse between buyers and sellers to end by 2023 as both sides get a “better sense of the new normal”.

Kristin Smith, principal at Montreal-area private equity firm Novacap, said “we’re already seeing a shift in the mindset of sellers where they’re no longer fixated on 2021 values. I think we’ll continue to see more and more private parties.” The values ​​have dropped, I think people’s mentality is zeroing. Many tech companies going public were lured by IPO values ​​that no longer exist. They may be better served as a private company” over the next 18 months so they “can take advantage of some of the uncertainty in the market, especially with a well-funded partner behind them.”



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