Great story on Veinna Systems
A hunger for Vienna
Newbridge affiliate aims to profit from IP
technology
Andrew McIntosh
The Ottawa Citizen
Vienna Systems Corp., a
Newbridge affiliate, is trying
to raise $30 million in a
private financing, which is
being touted as a final round
before the Internet telephony
company goes public next
spring or summer.
Vienna shares are being
offered at $12 each to North
American mutual fund
managers, a price that
estimates the tiny,
three-year-old Kanata-based
company's worth at about
$180 million.
The move, designed to
increase Vienna's
shareholder base in the
United States as well, comes
less than a year after Vienna
executives raised $15.9
million in a first private round
of financing in late 1997.
That deal, sold at $4.50 a
share, was gobbled up by the
big fund managers.
As the latest marketing blitz
unfolds, however, Vienna has
become the object of some
of the hottest, most tantalizing
rumours in both Ottawa
technology circles and the
investment world across the
country.
And Vienna chief executive
officer Kent Elliott, a
marketing and accounting whiz with an MBA, does little to dispel the
chatter.
"My word! I must admit, this is making me smile what are you hearing?"
Mr. Elliott said between stops in Vancouver, Montreal, New York, and
Boston.
Investment industry executives all hear the same Vienna stories these days.
They have told the Citizen that several data networking giants, among them
Cisco Systems Inc., Siemens and even Newbridge itself, which owns 20
per cent of Vienna, have expressed interest in acquiring the company.
That interest, while serious, apparently stopped just short of obliging
Vienna's board and management to take the offers to shareholders in
writing.
"I can't speak to any of that stuff," Mr. Elliott said when asked about
existence of rival suitors for Vienna.
"Your presumption is that there was a very formal offer on the table that the
board had to accept or reject. That's a very big leap from having
conversations with people that come to certain points.
"I have conversations probably every month with different kinds of
companies and every one of them are under non-disclosure (agreements),"
he added. "And on that basis, I am not at liberty to even talk about even the
parameter of what our discussions were about."
Mr. Elliott, who noted that Vienna already has a partnering arrangement
with Siemens, felt much freer to speak in generalities.
"Is there interest in our company? Absolutely!" he said. "We're very hot.
We're in a hot industry with a hot product right now. We're at the forefront
of all of this."
Vienna makes special server-based software and hardware products to
handle voice, data and video calls across Internet protocol networks, one of
the global telecommunication industry's hottest sectors right now.
When asked if Newbridge had expressed interest in buying back its own
affiliate, Mr. Elliott offered this cryptic reply: "There were rumours galore
coming out of Newbridge that came to all our employees. That caused a lot
of problems for us. I'm not saying we haven't had conversations about that,
either. Newbridge would be foolish not to look at that and consider that."
A Newbridge spokesman said the Kanata networking giant would make no
comment on facts detailed in this story.
But newly installed Newbridge president Alan Lutz categorically told one
technology portfolio manager, Tera Capital's Duncan Stewart, in mid-July
that Newbridge would never buy back an affiliate. Period.
Yet that story changed during a July 28 conference call with analysts.
Another investment analyst asked Mr. Lutz if Newbridge would buy back
affiliates. This time, the president offered a very different reply that Mr.
Stewart said represented "a significant strategic change in policy."
According to a tape of the conference call, Mr. Lutz suggested
Newbridge's preferred option for affiliates was to sell its stake in an IPO.
But he also opened the door, to Mr. Stewart's surprise, to a buy-back if
necessary.
"My own personal view is that an IPO is a great exit, a natural exit for that
activity," Mr. Lutz said. "I don't think we need to have absolute control in
order to inculcate our product with that technology."
He then added: "If there's something that's so fundamentally important that
we should own it forever and ever and ever, then maybe we would consider
(a buy-back)."
Mixed messages like that have Mr. Elliott's office telephone ringing more
than ever as he juggles calls from shareholders, fund managers, industry
analysts and employees all curious to know what is really going on.
"It's satisfying and challenging," he said when asked how it feels to be the
object of so much professional curiosity and speculation.
"But do you know what? You have to remember, we're by no means, as a
company at our stage, in an environment where we are out of the woods.
We have a lot of work to do and that's what we're trying to put together."
All that work, though, is taking place under the larger shadow of an eventual
takeover, one that industry observers and even Mr. Elliott suggest might
come sooner rather than later.
"Logic tells me that, at some point in time, somebody is going to make a
move because they need what we have," Mr. Elliott says.
The trouble that the Vienna executive team is having these days is
convincing institutional investors that, should a formal takeover offer arrive,
for Vienna, nobody is going to impede their ability to cash in.
Mr. Elliott said many of his shareholders and potential new investors are
under the erroneous impression that Newbridge can veto any takeover bid
for Vienna, a perception that he said is completely untrue.
"My job was to make sure that we didn't put ourselves in the position where
somebody like Newbridge could stop that (a Vienna takeover) from
occurring," he said.
"I'm not saying that if they (Newbridge) only owned 10 per cent or less it
wouldn't be easier, but that's not the case. So you say, 'How can you
minimize the impact they can have? And that's what I have done. Do they
like that? Probably not, but that's life," he added.
Five fund managers took the unusual step of signing and sending what one
of the managers described as a "strongly worded" confidential letter to
Vienna's board of directors prior to the company's annual meeting in June.
The last round of private investors included purchases by mutual funds run
by the Royal Bank of Canada's investment management arm, Sceptre
Investment Management, Spectrum United and AGF Investment
Management.
The letter, one fund manager said, was intended to remind Vienna directors
that they represent all Vienna shareholders, not just Newbridge and its
chairman, Terry Matthews, who directly and indirectly owns nearly another
20 per cent of Vienna.
That gives Newbridge and Mr. Matthews close to 40 per cent of Vienna.
Mr. Matthews and Scott Marshall, a Newbridge executive vice-president,
also sit on Vienna's board of directors.
Vienna chairman Peter Sommerer, a former Newbridge vice-chairman and
associate of Mr. Matthews, also controls 20 per cent of Vienna.
Mr. Elliott, who confirmed that the fund managers had sent such a letter to
Vienna directors, is categorical.
"We've certainly got a letter. All I am saying is that we addressed that. With
all the options available to us, the board has made decisions in the best
interests of the company," he said, "and it has nothing to do with rejecting
anything for the benefit of Newbridge by any means.
"Newbridge and their friends are not in control of our company. We are
one of the few affiliates in that position. We are fortunate, but we've gone
out of our way to make sure we didn't get in that position."
Not to be overlooked are events in the marketplace in the past year that
demonstrate that Newbridge is "uninterested" in being a minority
shareholder in emerging technology companies acquired by larger ones, Mr.
Elliott added.
Broadband Networks Inc., a Winnipeg company in which Newbridge had
invested, was acquired by Northern Telecom Ltd.; Skystone Systems
Corp., an Ottawa based company in which Mr. Matthews' personal venture
capital company had invested, was acquired by Cisco Systems Inc.
"Terry Matthews could have held on and forced more complicated
takeovers, but he chose to just fold and sell," Mr. Elliott said.
Internal Vienna documents, obtained by the Citizen, illustrate the close
connections between the company and Newbridge. The documents show
that Vienna paid:
$272,100 to a property development company controlled by Mr.
Matthews for rent of its office space in Kanata in fiscal 1997.
$3,067,000 to Newbridge Networks for sub-contract product
manufacturing services pursuant to a services agreement during the same
year.
As well, in June, Vienna issued 1,616,000 Class A shares to a research and
development company controlled by Mr. Matthews - shares now worth an
estimated $19.3 million - in exchange for an unspecified technology. In
1996, Vienna had received $1,865,000 from the Matthews company under
a research and development agreement to develop this new technology.
Mr. Elliott acknowledges that such close relationships give Newbridge
influence.
"Of course they have influence, but they do not have 50 per cent plus one,
nor can they," he said.
Mr. Stewart of Tera Capital said such apparent tension between Vienna
management and Newbridge is a sign that Newbridge's three-year-old
affiliate program has grown fast and is maturing quickly.
"For Newbridge, creating these affiliates is a lot like having kids. When
they're babies, they're all perfect," Mr. Stewart said.
"When they grow up, you get some that are rebellious. Some want to leave
home early, some don't want to leave home at all and, quite frankly, some
don't quite turn out as well as you had expected," he said.
"In Vienna's case, it is a little difficult to determine how much of this is them
wanting to leave home too early and how much of it is due to overprotective
parents," Mr. Stewart added.
Mr. Elliott said having Newbridge as a major shareholder has been a mixed
blessing.
"There are parts of this ownership structure that make my job a lot more
complicated than it needs to be," he said. "There are parts of this ownership
structure that make my job much easier than it might be."
"Overall, I'm telling you it was lot easier to get to the stage we're at with the
structures we have,"Mr. Elliott said.
He said it has been advantageous for Vienna to be able to build its
hardware at Newbridge's Kanata plant because its rates are competitive
and the plant is down the street from his own office.
"I'm able to compete as if I am a $2 billion company. . . That's a
tremendous advantage over the people I am competing with," he said.
"There are a lot of good things. There are things that are more troubling. Is
everything perfect? No. Are there are struggles? Absolutely! And they
balance off."
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