Ottawa’s 'dead money'

Courtney Symons
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Some of Ottawa’s largest tech companies are either delaying the country’s economic recovery or, depending on one’s perspective, prudently managing their balance sheets.

(Stock image)

In August, Bank of Canada governor Mark Carney highlighted the growing cash reserves held by corporate Canada, calling it “dead money” that should either be invested or returned to shareholders.

While acknowledging that global uncertainty may prompt companies to be more conservative with their cash, Mr. Carney suggested in a speech to the Canadian Auto Workers Union that businesses aren’t doing their share to spur economic growth.

Earlier this fall, a popular Canadian technology stock newsletter compiled a list of this country’s best-capitalized technology firms, measured as a percentage of their cash to market capitalization. A disproportionate number of Ottawa firms appeared, including Espial Group Inc., Mitel Networks Corp. and DragonWave Inc.

Including short-term securities, these three companies have cash-to-market-cap ratios of between 55 and 63 per cent.

By way of comparison, that’s higher than tech giants Cisco Systems (49.3 per cent), Microsoft (29.76 per cent), Oracle (21.8 per cent) and Apple (5.5 per cent), as well as some of their Ottawa peers. (Dell, on the other hand, has a ratio of 88.4 per cent).

What determines an excessive amount of cash depends, of course, on the nature of a company’s sector as well as specific circumstances. But even if the amount of monetary assets are high – Statistics Canada said non-financial firms were holding $560 billion at the end of the first quarter of this year – some local experts argue it’s appropriate.

“Even with excess cash reserves, in view of the uncertainty in the economy and the difficulty in accessing money in private and public markets, it’s probably prudent to have extra cash,” says Paul Amirault, a partner at Norton Rose in Ottawa.

Companies of any size have reasons to keep their coin, he says. Bigger companies with debt need extra cash to meet banking covenants. Early-stage firms need money for R&D, equipment and market exploration. Many companies looking to grow by acquisitions will keep cash on hand to take advantage of buying opportunities.



When the Lehman Brothers filed for bankruptcy in 2008, local merchant banker firm Acorn Partners decided to err on the side of caution, says founder Peter Kemball.

“We deliberately kept a very large amount of cash in relation to our business needs,” he says. “That was just for fear that when we needed it, we wouldn’t be able to get it.”

Fast forward a few years, and Mr. Kemball says he understands why local companies are still keeping cash. Mr. Carney’s comments have some merit, he adds, but there is a disconnect between what is good for citizens of Canada and what is good for an individual company.

“Without cash, you don’t have any options,” he says. “The pros in cash are overwhelming in relation to your obligations.”



Nonetheless, Mr. Carney’s opinion resonates with others in Ottawa.

Patrick Power, president of Ottawa-based boutique investment bank James Edward Capital Corp., says he is amazed by the amounts of money some companies are keeping.

“Cash is what makes the world go ’round,” he says. “If consumers or businesses are hoarding cash, it really hurts the economy.”

Money in the bank may generate between one to eight per cent in interest, he says, but a smart CFO could find a much better investment.

And if the public company is trading at less than the cash value of the company, it is a sign of serious mismanagement, Mr. Power adds.

“That’s not treating your shareholders very well,” he says.



Business owners are aware of the pros and cons of cash, Mr. Amirault says, and they must decide on a case-by-case basis what will provide a better return in the long run – cash or investment.

“I don’t think any company or board is unaware of the importance of cash and that there are pressures to use it in the best way possible,” Mr. Amirault says.

When the economy speeds up again, he predicts Canadian companies won’t be under fire for hoarding money – they’ll be too busy spending it.


SIDEBAR: OBJ takes a look at percentage of cash compared to market capitalization – or the total value of issued shares – of five publicly traded local technology companies.

Espial Group Inc. (TSX:ESP)

Profile: Digital TV and IPTV software and solutions supplier

Market cap: $15.7 million

Cash, cash equivalents and short-term securities: $9.96 million

Percentage: 63.2%

Quote: “The company manages its capital, being cash and short-term investments, debt and equity, with the primary objective being safeguarding of its working capital.” - Espial Q1 2008 financial statement.


DragonWave Inc. (TSX:DWI)

Profile: Mobile backhaul provider

Market cap: $71.5 million

Cash, cash equivalents and short-term securities: $43.6 million

Percentage: 61%

Quote: “The company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.” - DragonWave Q1 2011 financial statement.


Mitel Networks (TSX:MNW)

Profile: Telecom provider

Market cap: $139.5 million

Cash, cash equivalents and short-term securities: $77.5 million

Percentage: 55.5%

Quote: “We elected to prepay $25 million of our outstanding first lien debt, which provides us with the opportunity to utilize our surplus cash to lower our interest payments.” - Mitel CFO Steve Spooner, Q3 2011.


Calian (TSX:CTY)

Profile: Technology services seller

Market cap: $159.8 million

Cash, cash equivalents and short-term securities: $32 million

Percentage: 20%

Quote: “Our unwavering focus on cash flows has once again yielded a strong cash position and a high return on invested capital.” - Calian president and CEO Ray Basler, 2011 annual report.


Nordion (TSX:NDN)

Profile: Health science company

Market cap: $408.6 million

Cash, cash equivalents and short-term securities: $81.9 million

Percentage: 20%

Quote: “We are focused on providing meaningful returns to our shareholders through using our cash on hand, cash from operations and access to capital to selectively invest in growth opportunities and projects focused on maintaining existing margins and cash flows that are intended to drive long-term share price appreciation, and return cash to shareholders that is not otherwise required for growth or operational purposes.” - Nordion financial statement, Q3 2012.

Note: Market cap figures are current as of Nov. 20 on the Toronto Stock Exchange.

Organizations: Bank of Canada, Canadian Auto Workers Union, Espial Group Inc. Mitel Networks Corp. Cisco Systems Microsoft Oracle Apple Statistics Canada Norton Rose Lehman Brothers Acorn Partners James Edward Capital

Geographic location: Ottawa, Canada

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