Searching for the next tech champion
Mitel and DragonWave are top two candidates
The technology industry in the national capital region had a rough 2012 as a weak global recovery and increased competitive pressure forced big players such as Alcatel-Lucent and Cisco Systems, many small companies and several defence industry players to cut jobs.
Technology employment fell more than six per cent during the year to 41,500 jobs, only slightly above the post-bubble low in 2004 and almost 30,000 below the recovery high in 2007.
There were few candidates ready to step into the leadership
vacuum despite a host of promising but tiny social media, gaming, cloud computing and other startups with big dreams for the future.
Mitel and DragonWave are the biggest contenders. They had radically different years. Mitel outperformed competitors and its stock soared 60 per cent in the summer, then stumbled and ended the year with the stock just slightly positive.
Mitel cut 200 more jobs during the year as chief executive Richard McBee bet that selling communication gear to smaller companies in a few key markets through partners was better than direct sales. But sales weakened during the year and Mitel had to cut costs to get back to profitability.
DragonWave, another hometown giant, had a rough year. It was forced to slash employment early in 2012 and postpone an earnings call at the end of the year because of weak sales and trouble integrating a big acquisition of Nokia Siemens Networks gear. Chief executive Peter Allen travelled to Dubai, Doha, Delhi, Mumbai, Singapore, Indonesia and Malaysia trying to make the NSN deal work. At one point in the summer DragonWave stock fell 50 per cent. Even with the late warning of bad sales and a postponed earnings call, DragonWave ended the year with the stock down just 10 per cent. Not great but remarkably good under the circumstances.
Smart Technologies, an industry leader in interactive whiteboard technology sold to educators and television networks, continued to shrink. Started in Ottawa, it grew to become a major producer with hundreds of Ottawa assembly staff. But that operation closed, the founders left and new management is slashing research and development employment, now below 100, even deeper.
Fortress Paper, which makes specialized cellulose for Asian clothing manufacturers, went from hero to zero in one year.
The stock had soared when a converted Thurso pulp mill locked up big contracts as production ramped. But then the market changed swiftly as Asian growth slowed and other competitors entered. The result is Fortress stock fell 75 per cent.
Some simply disappeared. Exar, a California chip company that owned the former Galazar and Neterion Ottawa startups, closed the Ottawa doors as a new CEO charted a new course for survival. It once had more than 100 employees here.
The future of Ottawa’s technology sector is increasingly in the hands of giants with headquarters around the world. As the year closed, Ericsson was searching for a formula to restore profitable growth. It cut 1,550 jobs in Sweden, about nine per cent of the workforce, in what may be the first of more cuts.
When sales lagged early in the year, Ericsson blamed a downturn in older wireless gear inherited from Nortel Networks. That was rich — the Nortel CDMA products had kept Ericsson on track in 2009-11 when Huawei Technologies started attacking. It was also wrong.
Pressured by U.S. regulators, Ericsson admitted that the Nortel wireless gear was responsible for about only one-fifth of the problems.
Alcatel Lucent got a lifeline from investment bankers with a $2.2-billion credit line but had to put up patents as reserves — a decision that bothers the new French Socialist government. Narrowly avoiding a bankruptcy protection filing, Alcatel went through one round of 5,500 layoffs and was working on new plans to reduce losses.
Meanwhile, the Ottawa researchers at QNX Software spent much of the year under intense pressure from parent Research in Motion to deliver new operating software to restore competitiveness and end a huge loss of market share. The fruit of their work could determine very soon whether RIM survives.
With the ownership of so many once-independent Ottawa companies outside the country, observers had to turn to conference calls to read the tea leaves. James Peterson, the candid CEO at Microsemi ( Zarlink), said during a summer conference call: “The big question we get on the road is, ‘Hey, what’s going on in Europe?’ It’s uncomfortable. We know it.” The Zarlink communication chips helped the new owner while the medical chips in hearing aids and other devices were simply steady contributors.
Mystery surrounded another big sale: March Networks. Now in the hands of Shenzen Infinova, a Chinese company, after a bargain $90-million sale last year, March continued to roll out sales announcements. But the parent company shares took a 40 per cent plunge this summer with no obvious reason and no disclosures.
Amdocs, the Israeli communication software company that bought Bridgewater Systems last year, spent 2012 trying to reduce costs while big U.S. phone companies put off decisions. AT&T finally announced billions in spending plans, but it will likely take many quarters before the Bridgewater advanced-billing software generates expected results.
Skyworks Solutions, a hot stock with chips in most of the major smartphones, cooled out as the year progressed after a remarkable sure. There was one small early warning. The former holders of SiGe, an Ottawa chipmaker, got $5.4 million less than the $58 million they were hoping for in performance considerations that were part of the original $275-million deal.
GETTING IT RIGHT …
Some companies barrelled on despite the economy. Roper Industries, a diversified industrial products player including the Ottawa Lumenera line of scientific cameras, produced surprisingly consistent results. Thermo Fisher Scientific makes research gear for scientists and companies developing new products. It is not the most exciting business but the performance was excellent and investors were delighted even if markets were challenging.
Kudos to MHPM Project Leaders for leading the team that launched a rebuilt Bluenose II schooner in September, the latest version of the icon on the Canadian dime.
The $15.9-million job is the latest in a long line of projects for the Ottawa operation including the Richmond Oval for the 2010 Olympic Games.
There are many small private Ottawa companies like Ensyn, Energate and MyGroceryDeals that performed though they operate well outside the spotlight. MyGroceryDeals built at roster of 550,000 registered U.S. users who rely on its food store ratings rather than price flyers. After years of hard work, chief executive Paul Davis and his team have built a profitable operation.
Cadence Design Systems and Synosys had good years. That’s a positive sign because customers are buying their chip design software for the next generation of gear even if sales of older gear is weak.
Huawei said it will double an Ottawa workforce of more than 100 as part of plans to support the installation of LTE advanced wireless technology at Bell and Telus. The celebration quickly cooled as the new top global seller of telecom gear came under intense U.S. pressure because of alleged control by the Chinese government and possible security issues. Huawei had hired many top former Nortel Networks scientists as part of the development of the Ottawa operation. Despite being effectively frozen out of the U.S. market, except for some popular low-cost smartphones, Huawei grew vigorously during the year — though not quite as fast as in previous years.
While the forest products industry had a modest year, some niche companies did well. Glatfelter, which makes air-laid cellulose for diapers, weathered the market storm. It improved profits by efficiency improvements at a big Gatineau plant.
Akamai Technologies, which bought Blaze Software of Ottawa for $19.3 million in February, kept up the momentum as the year rolled on. Companies may worry about sales and profits in slower times but making their web pages work faster for customers and employees was still an important priority.
Two small Ottawa companies in technology baron Terence Matthews’ group of interests had much better years. True Context Solutions reported stronger results selling software that makes life easier for repair technicians with a sales push from AT&T, Bell, Rogers and other big partners. Counterpath lined up major phone companies as clients for software that manages business communications.
THE YEAR THE PATENT TROLLS SLEPT UNDER THE BRIDGE …
While Apple, Google and Samsung fought patent battles around the world, Ottawa’s own patent trolls had quiet years. Wi-LAN was occupied filing lawsuits against giants for alleged patent violations, changing law firms and courts and buying up new patents, but failed to demonstrate the results investors hoped for.
Rockstar Consortium, the Ottawa owner of many former Nortel Networks patents, spent the year distributing about a third of the 6,000 patents to Apple and other partners. It wasn’t talking about plans to turn the Nortel patents into revenue. Mosaid, similarly, was quiet as befits its new private status in the hands of U.S. private equity. But Cisco Systems ended that with an illtempered assault on “extortion and racketeering” tactics against Mosaid in the run-up to a court case in the U.S. Mosaid denied the charges, saying Cisco was just trying to open a new front in a war it has lost.
Google and Apple had a big surprise at the end of the year. They put aside their differences to jointly bid on patents of Eastman Kodak in a move that kept the digital camera gear from soaring like the Nortel Networks patents had to $4.5 billion. The price of $525 million was one-fifth of expected results and carried the added bonus of ending numerous Kodak suits. Finally, the unholy alliance of Google and Apple brought in several other giants, including Microsoft, Adobe and Facebook. The clear message to smaller patent enforcement companies like Wi-LAN, Mosaid and Rockstar is that the giants are determined to control the supply of patents and prices.
THE BEST DEFENCE IS …
For many defence companies, the U.S. fiscal cliff worries are nothing new. They have been dealing with reductions in U.S. military spending as wars wind down in Afghanistan and Iraq. General Dynamics, Lockheed Martin, Rockwell Collins, Curtiss Wright and other companies with Ottawa operations were forced to trim sales and earnings forecasts as U.S. defence spending cuts hit.
There were small cuts at CMC Electronics operations in Ottawa and Montreal after it forecast weak sales in the December quarter caused by slower than expected demand for cockpit renewal projects on military helicopters. The parent company, Esterline of Washington state, said the layoffs would trigger severance costs that would hurt results.
Curtiss-Wright didn’t let worries about defence spending cuts stop acquisitions. It forked out more than $335 million for four acquisitions for energy, sensors and other specialized technology as the year ended.
LOOK UP, LOOK WAY UP …
The satellite industry has been a strong and reliable performer for the Ottawa economy for years. This year was different. ComDev’s Ottawa operation was cut by more than half as weak federal government satellite spending cuts hurt sales. It previously had more than 100 highly specialized employees working on projects like a big telescope control package for NASA and a Radarsat project for the Canadian government. Despite making the Arctic a key part of the political agenda, the Conservative government has not financed the satellites that will be an important part of future growth.
Telesat started to turn the corner as the addition of new satellites supporting Bell TV and other broadcast clients generated significant revenues and renewed profitability. But foreign exchange changes were just as important. The U.S. and Canadian investors that control Telesat squabbled over how to exploit their stake. With stock markets in a funk, an initial public offering proved elusive, forcing Telesat to borrow more money to keep the investors happy with dividend payments. But top Telesat executives and some employees had an excellent year. They shared $48.6 million in special bonuses early this year as part of the first round of $656 million in special dividends to the restless owners.
International Datacasting was rocked by a spirited takeover fight involving key figures who took over the company just a couple of years earlier. The maker of satellite broadcast gear turned back the challenge but just a couple of months later a new board threw the top executives out the door.
IDC wasn’t the only company with a revolving door on the executive suite. Pacific Safety Products went through four chief executives in almost as many months as it struggled with sales of bulletproof vests and other protective gear.
OUR OWN CORPORATE RAIDER …
Brookfield Renewable Energy launched a hostile $150-million bid for Western Wind Energy, a Vancouver operator of wind farms, after backing the losing side in an earlier private equity raid for control. The bid could be a sign of a revival of interest in the alternative energy company. Brookfield had a great start to the year when a wet winter drove power-dam production. But it paid a stiff price when nature turned and dry and windless weather seriously hurt results from power dams and wind farms.
Still Brookfield did better than some other Ottawa renewable energy companies. Iogen laid off 150 employees after a joint venture with Shell to develop a prairie plant turning straw into ethanol finally collapsed. Rod Bryden’s Plasco had a challenging year getting a garbage-to-energy business on stream. Hopefully, with a deal with the City of Ottawa finally in place, other deals will follow.
The biggest deal of the year was likely the Ericsson deal, estimated at $100 million, for BelAir Networks. The specialist in Wi-Fi access gear used in airports and other public. BelAir has about 120 employees.
Constellation Software made numerous acquisitions during the year led by Harris Computer, an Ottawa operation. But sales and profits from software sold to school boards and local government lost steam because the recession is catching up with tax revenues.
UBM, a big British outfit, bought full control of Canada NewsWire for $30.8 million and plans to merge with PR Newswire and a growing line of trade shows. It is trying to sell UBM TechInsights, an Ottawa reverse engineering company. Together with Chipworks, TechInsights makes Ottawa a much-quoted address when Apple, Samsung and others unveil popular new smartphones and tablets. Geeks wanted to know what software and hardware was inside and the Ottawa wizards had the answers.
MXI, an Ottawa maker of aircraft maintenance software, was sold to Moelis, a U.S. private equity investor, after losing a big patent case. Seprotech was bought by WESA for $9.4 million in a reverse takeover involving two water purification companies.
Some deals didn’t make much sense. J2 Global, a California company that owns Protus of Ottawa, bought a big publisher of consumer magazines, Ziff Davis, for $167 million in cash. J2 makes its money selling digital fax and email services to business customers. But it said that it knows the digital advertising market, both as a buyer and a seller of advertising. It hopes to make money with PCMAG, Computer Shopper and Toolbox, which claim 50 million online monthly hits and $60 million in annual revenues.
Venture capital was scarce but some companies were successful in developing business plans that attracted support.
Diabolo Technologies was a big winners, landing $28 million in funding for chips that manage the flow of corporate data and support critical analysis. Founded by former Nortel engineers, it first raised $15 million in 2008 but then had to cut jobs and change directions when sales failed to match endorsements by some big industry players.
Ensyn Corp. got $20 million in funding from a Brazilian pulp industry giant for technology that converts waste to biofuels. The injection effectively valued Ensyn at $330 million and validated technology it has been nurturing for 30 years.
OneChip Photonics raised $10 million to help start manufacturing of technology aimed at the home broadband networks. Chief executive Jim Hjartarson said he worked hard keeping competitors in the dark. “For months I was like the mother robin trying to distract the fox from the nest by hoping around with a wounded wing.”
Several companies also were successful in finding new capital. Blinq Networks got $10.7 million for technology which moves wireless traffic in increasingly congested urban centres. Energate got $8.9 million for new smart thermostat energy conservation technology. Several companies raised $5 million or less including Embotics, Filetrek (formerly GridIron) and Panacis.
Privacy Analytics, a company led by University of Ottawa professor Khaled Emam, raised some undisclosed funding for technology that helps scientific researcher used patient data without breaking confidentiality.