Canadian tech firms merit more esteem

Canadian technology companies are not getting the respect they deserve.

So said Garry Foster, national director of high technology at Deloitte & Touche LLP in Toronto. He is hoping to help change that with the company’s Canadian Technology Fast 50 program, which provides a way for companies to profile their financial success.

First introduced in Canada last year, the program annually recognizes the 50 fastest growing technology companies in Canada based on compound rates of annual revenue growth during the previous five-year period. The list includes various sizes of public and private companies, and all technology industry segments including biotechnology, semiconductors, Internet, software and communications.

“Ranking a position in the Canadian Technology Fast 50 is a significant achievement in a global economy characterised by rapid change and intense competition,” Foster said.

A Deloitte & Touche study revealed Canadian companies perform at equal or better levels than their U.S. counterparts – of the top 100 fastest growing technology firms in North America, 10 of these were Canadian. Among Canada’s 1998 winners, Crosskeys Systems Corp. ranked 10th in North America, Entrust Technologies Ltd. ranked 16th and IPS Automation came in at 43rd.

“Given that the Canadian economy is approximately one tenth the size of the U.S. economy, this analysis suggests that Canadian technology companies are doing an outstanding job,” said Douglas McDonald, a partner in the corporate finance division of Deloitte & Touche.

Despite this, key technology indices demonstrate that Canadian technology stocks are undervalued, he said. The Deloitte & Touche Corporate Finance (DTCF) Mid-market High Tech Index – which lists on the Toronto Stock Exchange (TSE) — posted a 13 per cent loss over the 1998 period, while the technology-laden NASDAQ composite index in the U.S. rose by 40 per cent.

“The relative performance of these indices clearly demonstrates the lack of respect that Canadian companies are receiving in spite of their impressive revenue growth performance,” he said.

“Since technology is increasingly synonymous with economic growth, Canada’s lagging market valuations must be addressed.”

Robert MacLellan, a communications technology analyst at CT Securities Inc. in Toronto, said one of the main reasons Canadian technology stocks are undervalued is because this nation’s venture capital community is “sorely lacking” compared to that of the States.

“Just prior to going public, [U.S stocks] are marketed extensively by their venture capitalists and there is something of a light shone on them,” he said. “This is something that needs to improve greatly in Canada if we are ever going to have something that resembles Silicon Valley’s success model.”

According to MacLellan, many U.S. portfolio managers will not buy stocks listed solely in Canada. They consider the TSE’s governing body, the Ontario Securities Commission (OSC), to be “very poor second cousins” to the Securities and Exchange Commission (SEC) in the States.

“The rules in Canada are considered to be a little too fast and loose for some people. Nothing compares to the SEC. They will take off your head and hand it to you if you don’t adhere to the rules – whereas here, you can get away with murder.”

MacLellan said the SEC goes to much further lengths to protect the market from fraud and misrepresentation. As a result, less investment is attracted to companies solely listed in Canada.

“People always argue that Canadian technology is second to none. But having some of the best technology on the planet doesn’t really matter a whole hell of a lot, [from a value perspective] if you don’t realize that you are offering a kind of deficit by being Canadian-only listed.”

Stocks also tend to languish if they are not well known, he said, but programs like Fast 50 are not enough on their own to attract the needed awareness.

John Ryan, president and CEO of Ottawa-based Entrust Technologies Ltd., one of the winners in the program last year, agreed this is only one step in a larger issue.

“It helps – it’s all part of the important awareness for people. [To be put] on a list that’s objectively derived by an accounting firm usually carries some merit in the eyes of people who look at this stuff,” he said. “So it’s nice, but it’s merely one piece…of 10 or 15 critical elements of being successful.”

To be eligible for the program, companies must have been in business a minimum of five years, have a baseline revenue of at least $75,000 and be legally incorporated and headquartered in Canada. Organizations can apply for the 1999 program at