Category: Canada

J. Ari Pandes is an associate professor of finance and an associate dean at the University of Calgary’s Haskayne School of Business.

Michael J. Robinson is a professor emeritus in entrepreneurship and innovation at the University of Calgary’s Haskayne School of Business.

A key message often communicated to entrepreneurs is the importance of respecting the capital provided to their companies – the financial and human capital. This message should resonate equally loudly with Canada’s politicians, who sometimes fail to recognize that capital is footloose – financial and human capital flow to higher-return, lower-risk opportunities, wherever they are.

Recognizing this free movement of capital requires policy makers to regulate efficiently and effectively. Unfortunately, this has not been the case over the past decade in Canada. This failure has limited the ability of high-potential Canadian corporations to attract the resources needed to grow in this country.

Private-sector professionals and senior personnel from the Bank of Canada have sounded the alarm about declining Canadian productivity for years. While various explanations have been suggested for this problem, we argue that the inability of Canadian firms to attract the investment needed to support innovation has been a significant factor.

The dramatic decline in the number of publicly traded companies around the globe has been well documented. In the United States, the number of public companies is down by nearly a half from its peak in 1997. Canada has experienced a similar decline after the number of public companies on the Toronto Stock Exchange peaked in 2008.

Many U.S. academics are not concerned about the decline in their public markets as increases in private equity investments have more than filled the financing gap. This has allowed U.S. companies to remain private longer and also provided existing public companies an off-ramp to the private markets. Indeed, U.S. and global private equity markets have grown significantly; data from McKinsey & Co. shows a near doubling of annual private equity investments globally from 2014 to 2023, to US$2.1-trillion.

Unfortunately, the same growth has not been observed in Canada. Alarmingly, the Canadian Venture Capital Association (CVCA) reports that annual private equity investments in Canada fell from $41.2-billion to $9.7-billion from 2014 to 2023 – a decline of more than 75 per cent. Looking at individual provinces, private equity investments declined by 30 per cent in Quebec, by 80 per cent in Ontario and British Columbia, and by 93 per cent in Alberta.

One bright spot has been the growth of Canada’s startup ecosystem. Major Canadian universities and regions across the country have established programs that provide support and mentorship to help founders during the crucial startup development phase for new ventures.

Together with this mentorship support, Canadian founders have also attracted increased financial support. The CVCA reports that venture capital investments increased from $2-billion in 2014 to $7-billion in 2023. Thus, it appears that Canadian entrepreneurs are creating valuable intellectual property and developing scalable business models that are allowing them to attract early-stage financing.

This success is consistent with studies showing that Canada actually performs well at generating new ideas and starting new businesses. This is not surprising, as we are among the top countries in per capita expenditures on postsecondary education and among the countries with the highest proportion of our adult population with postsecondary degrees. We also score very highly on relative rates of entrepreneurship.

As economists have noted, Canada does not have a startup problem, we have a scale-up problem. Our country fails at scaling up new businesses to a size at which they can compete on the world markets. As the above data suggest, one reason is that our later-stage corporations have trouble accessing private or public equity capital.

Another issue is that the high marginal tax rates for employees make it difficult to recruit the talented senior executives needed to help scale growing businesses. The market for talent is global, and successive taxation changes have resulted in Canada falling further and further behind.

Over all, these factors help cause our most promising young companies to either settle with stagnant growth, relocate the business or sell the company – typically to a foreign buyer.

Anyone involved in supporting entrepreneurial ventures can provide anecdotal evidence of Canadian entrepreneurs leaving the country or selling their companies too soon. Suggestive evidence can be gleaned by comparing venture capital (VC) exit data in Canada and the U.S. In 2023, the National Venture Capital Association (NVCA) reported 735 exits of U.S. VC-backed companies, 19 times more than the 38 Canadian VC-backed exits. Notably, more than 5.7 per cent of U.S. exits involved IPOs with an average valuation of more than $1-billion, while Canada had only one IPO (2.7 per cent of exits), valued at $337-million.

In terms of acquisitions, the average value of a U.S. VC-backed exit in 2023 was approximately $300-million, compared with just $12-million in Canada, excluding three major outliers. In 2022, there were no Canadian IPOs of VC-backed companies, and the average size of the 34 exits by acquisitions was a mere $20-million. These figures suggest that Canadian entrepreneurs are exiting their VC-backed ventures earlier and at lower valuations than their U.S. peers.

Recent tax changes have made Canada even less attractive for private investment. Raising the marginal tax rates on income and capital gains means Canadian entrepreneurs will be further inclined to sell their businesses early instead of investing time and effort to grow them into global champions. This not only stifles innovation in key industries of the future, but it also sends the message that success is penalized in Canada, rather than celebrated. With the proposed tax changes by the incoming U.S. administration, the odds of losing even more Canadian entrepreneurs to the U.S. has only increased.

If Canada aims to foster a thriving entrepreneurial ecosystem, politicians must rethink their tax policies to support and reward people who take the risks to build and scale their businesses. First, we should be raising the capital-gains exemption for Canadian-controlled startups to several million dollars, giving entrepreneurs the freedom to build without the fear of punitive taxes. Second, we must re-examine the personal taxation system that makes it so difficult to attract the international talent our scale-ups need.

Currently, all U.S. states have lower marginal tax rates than any Canadian province, and the gap is expected to widen in the near future. Without lower rates here, we risk losing our bright entrepreneurial minds to other jurisdictions, who will take their skills and potential tax revenues with them.

Finally, a more radical suggestion is to allow tax deferrals on capital gains by entrepreneurs and their investors when reinvested into new ventures within the same year. This would not only reward successful entrepreneurs but also increase the pool of capital available for innovation.

Our message to policy makers is similar to the message we give to entrepreneurs: Respect the financial and human capital that drives growth. In an era in which businesses can easily move across jurisdictions, Canada must create an environment where entrepreneurship is celebrated, not penalized.

It’s time for a comprehensive review of our tax and regulatory policies to foster homegrown success and businesses that can compete on the global stage. While these changes may spark debate, they offer a path to sustainable economic growth, which would be a superior approach compared with temporary and targeted government subsidies.

One last mega-deal closed out an eventful 2024.

On Tuesday, World Wide Technology (WWT), a tech services company based in St. Louis, announced it has agreed to acquire Canadian IT provider Softchoice in a deal that values the latter at $1.8 billion CAD (~$1.25 billion).

The deal, which is all-cash, was unanimously approved by Softchoice’s board, but has yet to be voted on by the company’s shareholders. It’s also subject to court approval and customary closing conditions; the firms expect it to be finalized in late Q1 or early Q2 2025.

If it isn’t, Softchoice could be on the hook for a $49 million CAD (~$34 million) termination fee. Its board has retained the right to consider other offers, however.

In a statement, Jim Kavanaugh, WWT’s co-founder and CEO, said that Softchoice’s software, cloud, cybersecurity, and AI capabilities will complement WWT’s existing product portfolio.

“Softchoice has been a transformative player in the IT industry for over 35 years,” he said, “and [this acquisition will] enable us to create even greater value for our clients striving to achieve their digital transformation goals.”

Softchoice was founded in 1989 by David Holgate and Jone Panavas to supply hard-to-find software products to enterprise customers. The company grew and evolved over the years, and now is one of the largest tech solutions and services providers in North America, according to Softchoice’s website.

In 2013, private equity firm Birch Hill acquired Softchoice for C$412 million (~$286 million), per Crunchbase. Close to a decade later, in 2021, the company filed for an initial public offering on the Toronto Stock Exchange (TSX) that valued it at around C$1.15 billion (~$800 million).

Softchoice’s financials have been fairly strong as of late. In Q3 2024, the company reported a 10% year-over-year increase in gross profit and 8% uptick in net income, driven by an expanding customer base. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $23.2 million for the quarter, up 2.2% from Q3 2023.

WWT says its offer represents a total shareholder return of around 62% over Softchoice’s initial public offering price. Should the deal go through, Softchoice will delist from TSX.

“We are excited to join WWT,” Softchoice president and CEO Andrew Caprara said in a press release. “Its scale and global reach, customer base of large organizations, and industry leading infrastructure solutions are a perfect complement to our software and cloud focused solutions, our Canadian presence, and our strength in the North American mid-market.”

Story continues

U.S. technology firm World Wide Technology Holding Co. LLC will buy Canada’s Softchoice Corp. SFTC-T in a $1.8-billion deal as it looks to grow its position in Canada, the companies said Tuesday.

World Wide Technology, a St. Louis, Mo.-based company, said it would pay $24.50 a share, which is a 14-per-cent premium to Softchoice’s closing price on the Toronto Stock Exchange Monday.

The deal makes Softchoice, a Toronto-based information technology services firm, the 11th of 20 tech companies that went public on the TSX during the mid-2020 to late-2021 pandemic bubble to exit public markets. Unlike most other re-privatizations, Softchoice is going out above its issue price, with a total shareholder return of approximately 62 per cent to the company’s initial public offering of $20 a share.

The deal is expected to close at about the start of the second quarter of 2025, pending regulatory approvals.

Before Softchoice, Payfare was the latest Canadian company from the pandemic bubble to exit public markets. U.S. fintech firm Fiserv announced on Dec. 23 that it would buy the Canadian fintech in a $201.5-million deal, as part of its efforts to expand payments offerings for gig-economy workers.

Read more”>Read more

DG Innovate PLC (LSE:DGI) (DGI) has signalled its departure from the London Stock Exchange, capping off a tough year for the market.

“>BAE Systems PLC (LSE:BA.) and defence sector rivals are expected to ramp up dealmaking ahead as global conflicts drive cash flow and demand for new technologies.”>Endeavour Mining PLC (LSE:EDV, TSX:EDV, OTCQX:EDVMF) topped the early risers with a 1.4% gain as precious metals peer Fresnillo PLC (LSE:FRES) also gained.

Ashtead Group PLC (LSE:AHT) led the fallers in the meantime in the absence of any major movers, dropping 1.1%.

“>

Read more”>Read more

DG Innovate PLC (LSE:DGI) (DGI) has signalled its departure from the London Stock Exchange, capping off a tough year for the market.

“>BAE Systems PLC (LSE:BA.) and defence sector rivals are expected to ramp up dealmaking ahead as global conflicts drive cash flow and demand for new technologies.”>Endeavour Mining PLC (LSE:EDV, TSX:EDV, OTCQX:EDVMF) topped the early risers with a 1.4% gain as precious metals peer Fresnillo PLC (LSE:FRES) also gained.

Ashtead Group PLC (LSE:AHT) led the fallers in the meantime in the absence of any major movers, dropping 1.1%.

“>

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