Taxpayers miss out in sale - Endace co-founder

TOM PULLAR-STRECKER
Last updated 05:00 08/12/2012
Steven Joyce
Economic Development Minister Steven Joyce

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Controversy over the £80 million (NZ$154m) sale of hi-tech darling Endace turned personal after co-founder Selwyn Pellett, who owns 5.8 per cent of Endace, traded barbs with Economic Development Minister Steven Joyce.

One lesson was that Endace probably listed too early and on the wrong exchange when it decided to raise capital on London's junior Alternative Investment Market in 2005, Endace chief executive Mike Riley said.

Joyce told BusinessDay the Government was reviewing the grant scheme blasted by Pellett yesterday and changes were likely.

Pellett said he had "very mixed feelings" over the sale of the Waikato University spinoff to United States' Emulex Corporation. Only 17 per cent of Endace is owned by New Zealand shareholders who will net $30m from the sale.

Pellett said it would have been better for taxpayers if the Government had provided millions of dollars of assistance it had given the company in the form of an investment rather than as grants.

They included a technology grant worth up to $6.7m over three years awarded by the Foundation for Research, Science and Technology in 2010.

Technology grants given by successive governments to the likes of Endace, Navman and Fisher & Paykel had resulted in "taxpayers' money ending up in the hands of shareholders", Pellett said. If the Government had instead invested, taxpayers would have received a share of the proceeds from the Emulex and other takeovers.

Joyce had earlier suggested Pellett was being hypocritical and told BusinessDay there was nothing to stop Pellett repaying his share of the grants to the Government. "So you collect taxpayer support, decide to sell shares, make lots of money and then moan about it," he told Pellett in a tweet which he labelled "unbelievable".

Pellett said he realised he would benefit personally from the grants given to Endace and the firm's subsequent sale, but said Joyce should "check all his facts".

Endace chief executive Mike Riley noted Pellett had agreed to give an "expression of support" for the takeover in a media statement released on Thursday.

Pellett said his position was that he would not be a "trigger" for the sale of Endace to Emulex, but would not stand in the way of the sale if other investors supported it. The sale is contingent on shareholders with 90 per cent of Endace shares backing the deal.

Riley said London's AIM stock exchange itself "unfortunately hasn't worked" and Endace' shares had been rarely traded.

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"A lot of companies are having a hard time in London right now. After the global financial crisis there has been a big flight to ‘size'. The liquidity has moved to the larger-yield stocks away from the growth stocks." That was no-one's fault, he said.

"Companies need to be of the right size and critical mass to list on any market and I wouldn't advise any company to list too early," he said. "It has cost this company hundreds of thousands of dollars a year to be listed. Think before you go public and ask yourself what you are going to get out of the public market," he advised.

Despite that, he said Endace regarded Emulex' takeover bid as "very friendly" rather than hostile. Emulex has indicated it intends to run Endace as a New Zealand-based business and grow its staffing levels in New Zealand where it employs 117 of its 180 staff, though Riley acknowledged there were no guarantees.

Pellett said he viewed Emulex as a "decent" company and believed its assurances should probably be taken more seriously than past broken intentions from overseas' buyers of other Kiwi technology companies - at least in the "medium term".

Riley refused to get drawn into the rights and wrongs of the technology grant system. "How governments should encourage the right environment to create research and development jobs is the Government's business, not mine," he said.

GRANTS SCHEME REVIEW

Economic Development Minister Steven Joyce said the Government was reviewing the technology grant scheme and might move to a system of funding only 20 per cent of recipients' qualifying spending rather than 50 per cent, as at present.

Rather than reduce the overall funds available, that would involve spreading them more widely to gain more leverage, he said. "That might take away some of the concerns."

The purpose of those grants was to encourage research and development in New Zealand regardless of whether it was by New Zealand or overseas-owned firms, he said.

The Government had a separate scheme, the Venture Investment Fund, that allowed the Crown to make equity investments in high-growth firms.

- BusinessDay.co.nz

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