NextWindow - another Kiwi tech gutted after offshore sale

Recipient of a no-strings, $6 million government grant sees its North American owner lay off most NZ staff.

For staff of companies like Navman and The Hyperfactory it's a familiar story. A hot NZ technology company is sold to offshore buyers, with its founder pledging jobs will stay in New Zealand - only for that promise to melt away as the new owners take control.

The latest casualty is NextWindow, a company whose revenue hit $60 million+ as it supplied touchscreen technology to PC makers like HP, Asus and Lenovo.

The recipient of a $6 million, no-strings government grant is gutting its local office, a source close to the situation tells NBR ONLINE.

Layoffs will see 11 staff left in NextWindow's Auckland office, which at the time of its 2010 takeover by Canadian company Smart Technologies housed around seven times that number.

Powerbyproxi leases space in the same building. CEO Greg Cross tells NBR his company has already taken over space vacated by NextWindow.

NBR left a message with NextWindow managing director Brian Ryan (ironically, a Navman veteran). The following reply was sent through a PR company:

NextWindow Limited has been a leading supplier of optical touch technology and touch-screen components to electronics manufacturers.

Global demand for these products is rapidly declining, and the company is taking a pro-active approach to address these market realities. NextWindow is therefore examining a proposed restructure of the business to manage costs in line with revenues in order to sustain global operations and continue to meet customer requirements.

Employees have been advised regarding a proposed restructuring of the business. NextWindow is working through a well-defined consultation process with staff.

When the Auckland company was sold to Canada's Smart Technologies in 2010, founder and CEO Al Monro (pictured) told NBR NetWindow had 120 staff worldwide, including 75 in New Zealand.

With annual revenue hitting $40 million, Mr Monro had recently leased extra space in NextWindow's building to accommodate anticipated extra staff.

“Our new owners were aware of that and supportive of that; I think there’s a strong commitment to grow the business here,” said Mr Munro.

Mr Monro was passionate and genuine in his belief that Smart Technologies should grow the local operation. But of course he was no longer in charge of the company's destiny. Smart Technologies is listed on the Nasdaq, and its board answers to shareholders.

In May 2012, NBR revealed Mr Monro was quitting Next Window (he left in December, 2012). Smart Technologies CEO Nancy Knowlton flew in to reassure NextWindow’s staff as Mr Monro’s departure was officially announced and McKinsay was retained to "undertake a deep strategic review."
 
The situation is nuanced. 
 
Even as NextWindow ranked third on the Deloitte Fast 50 in 2009, Mr Munro's mood a Deloitte announcement function was downbeat. He told NBR he was frustrated. He had tried to raise capital locally, but with no takers he had had no choice but to take on Kuwaiti investors.
 
And the Smart Technologies takeover had a dark genesis, with the sale resolving a patent spat between NextWindow and the far larger Smart Technologies, which had revenue of $US2 billion at the time of the takeover (read NextWindow admired buyer ‘until they sued us).
 
As anyone who's gone near a personal computing device in the past couple of years knows, touchscreen technology is booming.
 
But NextWindow, with its technology that is best-suited to larger displays has managed to miss the boat. 
 
According to the latest TIN100 report, its 2013 revenue catered to $27.4 million. But although it's partly a matter of cutting back due to market setbacks, NBR's source close to NextWindow says some R&D functions are being consolidated into Smart Technologies' main operation in Canada.
 
The insider noted that production staff in Asia were untouched by the restructure - perhaps an indication the market is not slowing down. The source adds, "Windows 8 was a flop and capacitive touch is getting bigger and cheaper so the market has cooled, but not that much."
 
Re-opening wounds
The NextWindow sale will reanimate debate in several areas.
 
One, why so many Kiwi tech startups reach a certain size (usually around $20 million to $30 million revenue), then get offshore - usually to Americans (see story links top right).
 
Two, why so many technology companies are being lost to NZ control full-stop. The TIN100 report ranks our 100 largest technology companies by revenue. Since 2010, 20 have been sold offshore.
 
Three, whether the government should make a company pay back an R&D grant after a sale. Orion Health boss Ian McCrae (whose company has received somewhere north of $8 million in direct grants) tells NBR this should be the case. Entrepreneur Sam Morgan says it would be better if the Crown had "some skin in the game," buying equity rather than ladeling out grants - and that's a big question given the government earmarked $321 million for its Technology Development Grants scheme. Should a future program have more strings attached?
 
Economic Development Minister Steven Joyce has defended the government's current scheme, however - notably in a December 2012 Twitter war with Endace founding CEO and shareholder Selwyn Pellett, as the network security company was sold to US outfit Emulex for $156 million.
 
NBR debriefed Messrs Joyce and Pelllett after their flame war.
 
Although he personally profited from Endace's sale to Emulex, Mr Pellett told NBR, "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,” 
 
Mr Joyce told NBR the grants are about drawing research and development activity to New Zealand. The $6 million was given to NextWindow at a time when the government was aware its sale to Smart Technologies was going through. Like other grant recipients, it had to match government funding. He would happily give an R&D grant to a foreign company that had never had any NZ ties if it was willing to bring R&D activity to NZ. He said there was a separate vehicle - NZVIF - for directly investing in startups.
 
And it should also be noted that not every off-shore sale goes badly. Navman (now owned by Taiwan's Mitac) is the poster child for things going south, with the GPS company's Auckland staff being culled from more than 500 to a recent 37 (there's also a few dozen working for fleet management spin-off Navman Wireless, majority-owed by US interests).
 
But others have prospered. Notably 3D visualisation software company Right Hemisphere, whose Auckland staff have been expanded since it became part of German multinational software company SAP. And while fleeting tracking technology company Telogis' ownership, intellectual property and profits are now all a Californian concern, the fast-growing company says it is doubling staff in Christchurch over the next year to 300. Trade Me founder Sam Morgan sold out to Australia's Fairfax, but has reinvested a lot of his money back into Kiwi startups, including Vend and SLI (although ironically another company he poured some of his Trade Me cash into, Sonar6, was in turn sold offshore, repeating the cycle).
 
And Trade Me itself has returned home, to a fashion, by listing on the NZX.
 
And being listed on the local stock exchange is surely an incentive for hot tech companies like Xero, SLI Systems and Wynyard Group to keep most of their operations in NZ. All of their CEOs hold deep and genuine beliefs that that's the right thing to do. But then again, if Xero lists on the Nasdaq - which it's opening eyeing - or a moneybags buyer comes knocking, things are more up in-the-air. Mr Drury, like any CEO, will have to weigh shareholders' interests.
 
The Endace situation will be an interesting one to watch. 
 
Emulex CEO Jim McCluney met with Mr Joyce as the sale was announced, and gave verbal reassurances about keeping R&D activity in NZ. And he told NBR his company will keep 190 or so Endace employees in New Zealand (most Endace R&D staff are in Hamilton - a function of the fact its network monitoring technology grew out of research at Waikato University).
 
But he stopped short of contractually committing to keep R&D work onshore, or making any type of formal commitment.
 
Let's see if the American CEO stays good to his promise. 

Or if the current government, or a future one, thinks of a why of keeping our hot tech startups in Kiwi ownership.

ckeall@nbr.co.nz

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