Editorial: Sharebrokers need technology nous

What reception do tech companies looking to list on the NZX receive from the financial community?

Some $166 million of taxpayer money is being spent on Callaghan Innovation (CI) over four years — a new Crown entity which Economic Development Minister Steven Joyce says will better connect New Zealand firms with science, engineering and technology.

Its board includes Sir Peter Maire, who founded Navman and then sold it to US firm Brunswick, thereby prompting much hand-wringing about why great New Zealand tech companies are sold off to foreign owners.

Other examples of this are Right Hemisphere, sold to SAP and Zeacom, sold to Enghouse Systems. Both companies benefited from taxpayer largesse, with the former receiving an interest free loan (paid off by SAP) and the latter a government grant.

Maire and his fellow CI board members could kick off the new venture by addressing the issue of how to retain large technology companies in New Zealand. If they do, then it’s likely they will look to the local financial market for some answers because one way to keep companies here is to list them on the NZX.

Indeed, there are some high profile tech companies rumoured to be listing in the next couple of years. These include software exporter Orion Health, mobile telco 2degrees and Kim Dotcom’s venture Mega.

What reception would they get if they did the rounds of sharebrokers?

Two recent events have made me wonder about the ability of market analysts to understand technology companies — and therefore be capable of enabling a public listing.

The first was the reaction in December to the Commerce Commission’s draft changes to the regulated price of the copper network owned by Chorus. The Commission is required by law to change the pricing method and it has proposed that the Unbundled Bitstream Access service be reduced from $21.46 to $8.93 per line a month.

On the day of the Commission’s announcement Chorus reacted with alarm, claiming the change would knock $150 million a year from its earnings from 2014, and may prompt a rethink of its business model (despite it knowing this change would occur). The Prime Minister John Key waded into the debate at a post-Cabinet press conference by not ruling out a change to legislation that would effectively override the Commission. And Chorus’s share price plunged 14 percent.

Meanwhile seasoned telco watchers shook their heads in dismay. Were market analysts not explaining to investors that this was a draft decision and that history shows that every time there is a determination the final price is higher than the draft?

On the same day as the UBA decision, the Commission produced its final pricing for Local Loop Unbundling at $23.52 per line a month. That’s close to what Chorus wanted and far from the draft decision the previous May of $19.75 (which the ISPs had argued for).

If I was an investor I’d be buying Chorus shares because the likelihood of that UBA decision going in its favour is very, very high.

I suggested to Miles Valentine, Zeacom founder and former CEO, he look at Chorus when we met for his exit interview. He’s having a hard time finding companies to invest in after selling his company last year.

Before the sale Valentine wanted to list Zeacom but he found that the New Zealand sharebrokers he spoke to — and he cited some well-known firms who’s analysts are often quoted in the media — know very little about software companies. “They’re very good at forestry and milk and retirement homes, but not software,” Valentine says.

He says because the brokers didn’t have analysts that understood software, they provided very conservative valuations.

How can we expect more technology companies to list publicly — and thereby help build a strong hi-tech industry - when they face the kind of unwelcome reception from sharebrokers that Valentine did?

Maybe Callaghan Innovation should use some of its taxpayer funding to run Technology 101 classes for financial market analysts.

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