Taxpayer millions will go to shareholders as US co makes $156m offer for NZ's Endace - founding CEO Selwyn Pellett

Yet another tech company that has received millions in government grants set to fall into overseas ownership. UPDATED Founder voices fears; US suitor meets with government, talks to NBR.

Another tech company that has received millions in government grants seems set to fall into overseas ownership. 

READ ALSO: Steven Joyce in Twitter war with Selwyn Pellett over Endace sale

California-based, NYSE-listed Emulex has made a £80.7 million ($NZ156 million) cash offer to takeover Endace, the network security company founded by entrepreneur Selwyn Pellett (who resigned from the board in 2010 and sold most of his shares at the same time).

The offer represents a 65% premium on publicaly-traded Endace's last closing price, all but guaranteeing its success.

Endace's technology allows its customers - which include government security agencies - to monitor network traffic. Mr Pellett recently relayed to NBR ONLINE his experience encoutering Huawei staff, and the Chinese military, at a conference in China as he built he built up the company.

Although listed on the London Stock Exchange's AIM board, most Endace staff, and the manufacturing for its network cards, are in New Zealand.

$11m plus from NZ taxpayer
Endace - which was born out of research at Waikato University - has received more than $11 million in direct government grants, and the move is sure to reignite debate over no-strings-attached taxpayer handouts.
 
This arrangement has made Endace founding CEO Mr Pellett uneasy about the deal.
 
Taxpayer money into hands of shareholders - Pellet
"Like many New Zealanders I am not confident this is a good thing long term," Mr Pellet told NBR this morning.

"New Zealand may well end up with more jobs in the near term but over time it's anyone's guess what will happen and no one can predict commercial imperatives that drive decisions in the future.

"My assumption is Endace will be run as a cost center and therefore the government has just lost a source of corporate tax revenue, the very reason the founders made the effort to remain a New Zealand registered company while still listing on AIM.

"I remain unhappy about taxpayers' previous R&D investment in Endace now being put in the hands of shareholders (including myself) via the sales process without compensation to taxpayers.  It's an issue that needs addressing in a country strapped for R&D funding.

"All that said if Endace had to be sold I think Emulex is a great home for what is undoubtedly one of New Zealand's Hi Tech Crown Jewels.  I think the price is acceptable although less than its highs of a year ago.  I think it’s a good outcome financially for the founders, the staff and bulk of the investors."

The CEO has given certain assurances that bode well for Endace's stay here in NZ. Jim Mc Cluney seems a very decent and honorable man who took the time to have lunch with me to give sone personal assurances."

Feel-good intentions, no formal commitment
On a conference call with media today Emulex CEO Jim McCluney said his company intended to keep offices, staff and research and development in New Zealand (Endace has most of its 190 staff in NZ in Auckland and an R&D centre in Hamilton; earlier this year it opened a Silicon Valley office).
 
Sometimes such promises have held good. But other times - as with most jobs associated with Navman - they have evapourated over time.
 
Asked if he would make a formal pledge such as a provision written into the deal to keep jobs in New Zealand for a set time, Mr McCluney said it was too early in the deal process to say.
 
The Emulex boss did reveal that he had talked to senior government officials yesterday (whom he and Endace CEO Mike Riley refused to name). Reassurances were given about New Zealand jobs. Mr McCluney also raised the possibility of more R&D spending, and possible collaboration with universities. 
 
There was potential to expand the local operation, Mr McCluney told NBR ONLINE. Emulex could double Endace's revenue ($US41 million last year), in part by giving it access to the US federal government market. Some of that money would be reinvested in New Zealand.
 
Earlier this week, Kiwi Landing Pad director John Holt - a cofounder of NZ software success story Sonar6 - told NBR such sales often brought money and talent into New Zealand. Many, like TradeMe founder Sam Morgan invested profits in other NZ start-ups (in Mr Morgan's case, one was Sonar6, recently sold to a North American company for $US14 million).
 

Today, Endace boss Mike Riley also made the argument that all of Endace's NZ staff were taxpayers, and that New Zealanders with Endace shares would benefit. Mr Riley said Endace and Emulex had been talking for around a year. Endace needed more funds for R&D, which its new owner could deliver.

Endace results would be reported separately. New Zealand innovation would be highlighted to an NYSE audience.

Flat profit, struggling shares
In May, Endace said its net profit for the year to March 31 was $US1.8 million, or 10.5 US cents per share, in the 12 months ended March 31, down from $US2.2m, or 12.95 cents, a year earlier.

Revenue grew 7.3% to $US41.2m, with wider gross margins at 73.1% from 66.5% a year earlier.

Emulex [NYSE:ELX], a storage and networking company, has a market cap of around US$600 million.

What would happen if Emulex was in turn was bought?

"The world is full of change," Mr McCluney said.

ckeall@nbr.co.nz

 

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