After London, there’s always Lourdes

Lost in the debate about the merger of the Toronto and London stock exchanges is exactly how a budding young company would be better off raising funds. Despite their claims, don’t forget, the stock exchanges don’t actually do the heavy lifting, they only provide the listing.

Take Research In Motion as an example I know well. Founded in 1984, it wasn’t until 1995 when going public was even considered. RIM was tiny, only 25 employees working in 2,500 sq ft in Waterloo, Ont. Revenue was $4 million. RIM had made a huge sale, $8 million, but the customer was slow to pay. Cash flow dried up and their lender, Bank of Montreal, was pressuring RIM to make payments and threatening to take over the company. RIM couldn’t find another lender willing to replace BMO.

Suddenly, out of the blue, an angel in the form of Rob Fraser of Griffiths McBurney Partners (GMP) called. GMP was an upstart Toronto-based investment banking firm, looking for entrepreneurs like Mike Lazaridis and Jim Balsillie, co-CEOs of RIM, in need of money. In May 1996, GMP introduced RIM to some likely financial backers in Toronto. Balsillie explained circuit and packet switching in a way that a child could understand. Circuit, one-way, is broadcast TV. Circuit, two-way, is cellular and voice. Packet, one-way, is paging. Packet, two-way, is the future and nobody’s there but RIM.

First to hear the story, Adam Adamou of Working Ventures, wanted in. Second call was to Frank Mersch at Altamira. He interrupted the presentation after three slides, pounded the desk, and said, “I want the whole deal. I’ll give you $50 million right now.” The next three calls were equally positive and by the end of the day RIM had commitments for $93 million.

That June, RIM did a private placement with five institutional investors for one-quarter of the company that raised $31.7 million after fees. RIM paid off the bank (whose tune suddenly changed to helpful) and had plenty of capital to grow. In October 1997, GMP did an initial public offering for RIM that raised $115 million (including $6 million in fees for GMP). Once again, the stock exchange was not involved except to provide the listing.

Fast forward to today, and the financing process is little different. Imagine a Canadian company like RIM, in a brave new world where the stock exchanges in Toronto and London have merged, going to London armed with a PowerPoint presentation. With no help from the London Stock Exchange, this company is wandering from Kensington to Canary Wharf, trying to get a hearing. The only Waterloo any of these toffs know is the battle where Wellington beat Napoleon. “Oh you have a university there, too? Never heard of it.” My wife and I have lived in London. I’ve worked there. I know how the English regard Canadians. We’re colonials, so far down the food chain we would’t get the crumbs from Oliver Twist’s bowl. Would the hearing be any better in Bruges or Berlin, Zurich or the Zuider Zee? I doubt it.

Even if the modern-day entrepreneur has drummed up some interest at home, if she’s going to list in London she still must hire local investment bankers, lawyers and accountants in London (thereby doubling her costs and further reducing her share). So tell me again, I may have missed it, exactly how does this proposed merger help a Canadian entrepreneur get to the next level?

Canada is a small capital market, only two-to-three per cent of the global business. It’s hard enough for the entrepreneur with fewer than 100 employees and $25 million in revenue to get attention. If she has to go to London, she might as well go to Lourdes. Heavenly intervention is more likely than fresh funds from the Brits or Europeans. Let’s stop this proposed merger before we become the lesser partner in a deal that does no good for those who need the most help, Canadian business looking for financing, and may indeed do some harm.