Presentation to UBC Commerce Faculty


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Presentation to UBC Commerce Faculty

  1. 1. Presentation to UBC Commerce Faculty Current Funding Issues for Technology Companies March 9, 2001
  2. 2. Presentation by Jeremy South Vice President, Investment Banking Jaysen Smalley Associate, Investment Banking
  3. 3. Agenda <ul><li>A commercial from Thomson Kernaghan & Co. </li></ul><ul><li>How the markets fared in 2000 </li></ul><ul><li>Some recent technology deals in BC </li></ul><ul><li>The key investment themes for 2001 </li></ul><ul><li>Valuation considerations </li></ul><ul><li>Impact on funding technology companies </li></ul><ul><li>What it means for our business </li></ul>
  4. 4. Company Overview <ul><li>Established in Toronto in 1949, Thomson Kernaghan (“TK”) is one of Canada’s oldest investment banks. </li></ul><ul><li>The capital of Thomson Kernaghan is owned by 74 shareholders, including 6 senior partners, which allows us to remain independent of any other organization. </li></ul><ul><li>Thomson Kernaghan is an entrepreneurial firm and as a result we relate well to fast growing companies and management teams that are also shareholders. </li></ul><ul><li>Staffed by over 200 employees, the firm has offices in Toronto, Montreal, Vancouver and Calgary. </li></ul>
  5. 5. Company Overview Continued <ul><li>Thomson Kernaghan is a boutique investment bank offering clients: </li></ul><ul><ul><li>Investment Banking Services (Corporate Finance and M&A Advisory); </li></ul></ul><ul><ul><li>Research; </li></ul></ul><ul><ul><li>Institutional Sales and Trading; </li></ul></ul><ul><ul><li>Retail Sales and Trading; and </li></ul></ul><ul><ul><li>Fund Management. </li></ul></ul>
  6. 6. Investment Banking Services <ul><li>Director, Alex. Brown Technology Investment Banking for Europe </li></ul><ul><li>VP for TK’s Technology Investment Banking Group - </li></ul><ul><li>BC Region </li></ul><ul><li>12 professionals across Canada, based in Toronto, regional offices in Calgary and Vancouver </li></ul><ul><li>Focus on small to mid-cap public companies and early stage private companies, primarily in the following industries: </li></ul><ul><ul><li>Technology (hardware/software); </li></ul></ul><ul><ul><li>Internet (ASP, service providers, applications); </li></ul></ul><ul><ul><li>eCommerce (B-to-B, B-to-C); </li></ul></ul><ul><ul><li>Media & Entertainment; </li></ul></ul><ul><ul><li>Communications; </li></ul></ul><ul><ul><li>Special Situations. </li></ul></ul>
  7. 7. EQUITY FINANCINGS Seed Capital Private Placements Special Warrants Initial Public Offerings Marketed Underwritings FINANCIAL ADVISORY <ul><li>Acquisitions & Divestitures </li></ul><ul><li>Related Party Transactions </li></ul><ul><li>Fairness Opinions / Valuations </li></ul><ul><li>Listing Sponsorship (CDNX, TSE, ME) </li></ul><ul><li>Corporate Re-structuring </li></ul><ul><li>Strategic Advice re: </li></ul><ul><li>Business Plans </li></ul><ul><li>Key Executives </li></ul><ul><li>Board of Directors </li></ul>U.S. CAPITAL MARKETS <ul><li>Regulation D Financing </li></ul><ul><li>Interim or Bridge Financing (prior to a U.S. listing) </li></ul><ul><li>Private Placement Financing (with U.S. investors) </li></ul><ul><li>Introductions to U.S. Investment Dealers and Legal Counsel for: </li></ul><ul><li>Public Offerings </li></ul><ul><li>Registrations </li></ul><ul><li>Listings </li></ul>OTHER Mezzanine Financing Private and Public Preferred Share Financing Private Placement Debt Financing Investment Banking Services
  8. 8. Selected Clients
  9. 9. How the Markets Fared in 2000 <ul><li>In 2000 the tech laden NASDAQ got hammered – down 40% </li></ul><ul><li>DJI down 6% and S&P 500 down 10% </li></ul><ul><li>Europe’s main indices were down </li></ul><ul><li>The main tech indices also suffered - TechMark down 40% and Neuer Market suffered major casualties along with a 40% decline </li></ul><ul><li>IPOs mirrored the market performance </li></ul><ul><li>Q1 2000 saw 141 issues at $24bn while in Q4 only 63 IPOs at $8.8bn while aftermarket performance was anaemic </li></ul><ul><li>Still a banner year for money raised - $81bn vs $69bn in 1999 </li></ul><ul><li>A wobbly start to 2001 – over 100 IPOs withdrawn in Q4 2000 – and investors remain wary </li></ul>
  10. 10. Deal Activity Year 2000 Small to Mid-cap BC Tech Co.’s (Deal size: $5m - $100m) (Canadian Issues Only)
  11. 11. <ul><li>$18 million special warrants trade </li></ul><ul><li>Online career management solutions for highschool students </li></ul><ul><li>Provitable internet company (Rare!) </li></ul><ul><li>Market timing was key. Very important to have solid financing strategy </li></ul><ul><li>Able to make strategic acquisition to build their business and execute their business plan </li></ul>
  12. 12. 12 Month Index Performance
  13. 13. 6 Month Index Performance
  14. 14. 3 Month Index Performance
  15. 15. The Key Themes for 2001 <ul><li>Value will be a constant theme </li></ul><ul><li>Institutional liquidity remains high notwithstanding a shift in the risk profile </li></ul><ul><li>Tech earnings growth is still in excess of the overall market and alternative investments </li></ul><ul><li>Fed intervention will provide some comfort for investors but the economic slowdown has taken hold </li></ul><ul><li>Companies solving major problems will continue to be funded </li></ul><ul><li>Semiconductors </li></ul><ul><li>Software/infrastructure </li></ul><ul><li>Networking </li></ul><ul><li>Bandwidth brokers, optical components may see selective gains </li></ul><ul><li>B2B enablers, wireless, security remain interesting areas </li></ul>
  16. 16. Criteria for all Investors <ul><li>Management, management and management </li></ul><ul><li>Addressable market </li></ul><ul><li>Time and route to market is key </li></ul><ul><li>Differentiating factors - technology, people etc </li></ul><ul><li>Are we in a “hot space”? </li></ul><ul><li>Projections are largely irrelevant for early stage companies </li></ul><ul><li>Sponsors - VC, investment banks, corporate venturers </li></ul><ul><li>Prospects for exit </li></ul><ul><li>Think outside the box - traditional rules for capital providers do not apply </li></ul>
  17. 17. Some Current Funding Themes <ul><li>The traditional seed and venture capital route remains the best route to follow for technology companies </li></ul><ul><li>VCs gorged themselves on new money throughout 2000 - $100bn raised in 2000 - but many investments are now in trouble </li></ul><ul><li>“ At best we are only 40% through the carnage” </li></ul><ul><li>US incubators have been particularly hard-hit </li></ul><ul><li>Current theme is smaller number of investments, bigger dollar amounts </li></ul><ul><li>Optical networking, some software still sought after but many areas are essentially unfinanceable – B2C, services, B2B, non-optical hardware </li></ul><ul><li>IPOs will resume in most markets in 2001 given liquidity position but selectivity once again is paramount </li></ul>
  18. 18. The Canadian Scene <ul><li>Run rate of $1bn a quarter inflow to private equity in Canada </li></ul><ul><li>Owes much to a small number of optical deals, largely financed by US venture funds </li></ul><ul><li>Historical conservatism meant many Canadian funds do not have same portfolio problem as the US players </li></ul><ul><li>Recent shakeout seen by many as proof of their position – valuations now more attractive </li></ul><ul><li>Steady increase in number and size of funds dedicated to technology </li></ul><ul><li>While we will feel impact of US situation, expect the momentum in Canadian tech financings to continue </li></ul><ul><li>M&A seen as equally likely exit as IPO </li></ul>
  19. 19. Valuation Considerations <ul><li>Top line growth at any cost is over for now </li></ul><ul><li>Valuation measures have moved down the income statement </li></ul><ul><li>PE to growth rate and PE multiple are back in vogue </li></ul><ul><li>Core valuation validation will come from publicly traded comparables </li></ul><ul><li>Poses a dilemma for pre IPO companies which have done high valuation private rounds </li></ul><ul><li>For private companies, valuations have been savaged and the rules are much fuzzier </li></ul><ul><li>Good valuations for great ideas; lower valuations for good ideas; no money for anything else </li></ul>
  20. 20. What it means for our business <ul><li>We need to keep reinventing our skill sets to stay in touch with the market </li></ul><ul><li>In particular we need to know what is hot and what is not </li></ul><ul><li>Deal/client selection will become critical </li></ul><ul><li>M&A in BC will be a major exit strategy for many small companies </li></ul><ul><li>Cash rich idea poor is better than vice versa at present </li></ul><ul><li>There are a number of bargains appearing on the horizon </li></ul><ul><li>Technology is here to stay…we are pausing for breath </li></ul><ul><li>BC can assume a mantle as a technology destination over the coming years </li></ul>