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October 21, 2014

Takeover effects

With the rumour mill churning once again that Blackberry, given its resurgence, makes an attractive takeover target for aggressive suitors like Lenovo, I thought it might be worth looking at previous takeovers of large Canadian tech companies and what the impact of those were.

For the sake of this discussion, I’ll keep the analysis to large publicly-traded firms. Let’s be clear though – this isn’t an exhaustive analysis, just (literally) a back of the napkin sketch. Luckily for me there are only three takeovers of $500 million dollar + revenue firms over the past decade or so.

As part of a recent DEEP Centre project we investigated takeovers of major Canadian firms. Across sectors, and over the period 2002-2012, we found just one Canadian tech firm with revenues over $1billion had been acquired, and just two with revenues between $500m and $999m. This evidently doesn’t include the hundreds of smaller, largely private transactions. That’s a project we’ve discussed undertaking but have yet to embark on.

  • Transaction 1 – Cognos acquired by IBM, 2007 Ottawa-based Cognos was acquired at the height of the pre-crash market in November 2007.  IBM then paid $4.9 billion for Cognos, or $58/share (a 9% premium). At the time of the acquisition Cognos employed 3500 around the globe, of which 1560 were based in Ottawa. Based on publicly available data, Cognos was investing approximately  $145 million into R&D in Canada. Fast forward and the legacy of Cognos is mixed. On the employment front, numbers aren’t easy to find on what’s left of those 1500 employees. My best source of data shows that as of a significant layoff in 2013, employment is likely down by upwards of 20 percent. Without knowing intimate details of what’s left in Ottawa, I might posit that we’re seeing a consolidation and reduction of admin functions across the new structure. On the investment front, while it’s now impossible to disaggregate IBM R&D investment from Cognos R&D in the new combined unit, given overall IBM R&D spending in Canada is up to $540m (from 145/360 in 2007), I’ll count this as a net positive though taking into consideration inflation on those dollars, there’s little real growth here. Between these two metrics, it’s a relative wash on net benefit, and perhaps a slight decline.
  • Transaction 2 – ATI Technologies acquired by AMD, 2006 Markham-based ATI was acquired by California-based Advanced Micro Devices (AMD) in July 2006. The deal was worth $5.6 billion USD in stock and cash. At the time of the acquisition, ATI employed 3500, though not all in Markham. Based on annual information fillings, I’ll estimate that over 2/3 (2400) of these employees were based in Markham. Today, this number sits at 1500. Nearly immediately after the acquisition, AMD cut approximately 200 admin functions from the Markham office. On the R&D front, ATI was one of the largest investors in R&D in the country prior to the acquisition. In 2005 it spent $450 million on R&D. In contrast, AMD spent just $265million in 2012. A significant decline. In order to win approval for the acquisition (via the Investment Canada Act), AMD committed to expanding its R&D presence in Canada, and to increase the both R&D staff and total expenditures. Without knowing the details of this commitment, it’s hard not to think that it was left unfulfilled.
  • Transaction 3 – Creo acquired by Kodak, 2005 Significantly smaller than the other two deals, in January 2005 Kodak purchased BC-based Creo Inc. for USD 980 million. At the time of the acquisition, Creo employed over 4000 worldwide, of which best estimates place 1400 in British Columbia. Creo, by the way, built advanced printing and graphics equipment.  In 2004, Creo spent over $138 million on Canadian R&D. Unfortunately it didn’t take long for there to be little left of Creo or Kodak. While Kodak’s reorganization cum bankruptcy in 2012 didn’t directly impact the Burnaby, BC firm, the old Creo was down to 400 employees by that time. This Canadian Business story covers the company’s sad decline quite well. As does this first-hand account from a former employee. It’s hard not to think that Creo was acquired simply for a piece of technology, and the IP behind it. Without limitation on future operations, Kodak quickly shifted much of the R&D out of Canada. The impact of this deal is overwhelmingly negative.

 

Now across these three cases it’s far too easy to assume these Canadian giants would have remained on the upward path. Given both turmoil in public markets and job reduction and business investment trends in other Canadian technology companies, the paths followed by Cognos and ATI since their acquisitions are best viewed as potentially no worse off than the alternative. That shareholders in Canada received buyouts at the top of the market is a slight carrot, and perhaps a big one should we follow the dollars.

Creo, however, is an unmitigated disaster. If there is a process of learning at play between them, the Canadian government’s request for commitments (regardless of whether they kept to them) related to Cognos and ATI may stem from Kodak’s stripping of Creo’s assets.

Fast forward to current rumors that Blackberry may be on someone’s shopping list. Would a sellout be bad for Waterloo and Canada? And how might we have answered that question in, let’s say, 2011? Then, the company employed 17,500 including 6,200 in R&D related fields and over 10,000 in Waterloo Region alone. It was also worth some $40 billion (down from a pre-crash high of $77 billion).

Would anyone have believed that a net benefit would be gained by approving a sale? Doubtful. Nor would they have for Nortel at its peak, or Celestica, etc. Yet fast forward to a company, albeit resurgent, that now employs just over 8,000 with 4,500 in R&D (and 2,700 in Waterloo Region) and a market cap of $5 billion and you see the problem with linear thinking.

Ultimately, measuring a net benefit on these deals is near impossible given doing so means trying to guess what the future looks like. The key for policy makers is extracting as many commitments as possible regarding local employment and investment, including metrics over the short, medium and long-term. The Investment Canada Act allows this leverage, albeit in an opaque fashion. Given the public investments that have helped develop Canadian tech companies (SRED, IRAP, NRC), finding a balance between the demands of the market and the needs of a local population are the least a policy maker can do.

All that said, given the data that Blackberry now carries, especially for government clients in Canada and the US, I’m going to guess that there will be little chance of a government approval of any takeover.

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