November 14, 2023: Tech boom fallout?

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Quick Take: Tech boom fallout?

Tech Boom Fallout: Questioning the Surge as Numerous Companies Delist from TSX

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What is the news?

On Monday is was announced that Sumeru Equity was buying out Q4 Inc. for $257m.

What does this mean?

This implies that Q4 is set to be delisted from the TSX and become a privately held company, leading to the buyout of public shareholders and the cessation of direct investment opportunities in Q4.

The outcome, whether favorable or unfavorable for investors, depends on their entry point. The acquisition price represents a 36% premium to the current market value but is slightly above 50% of the initial price when the company went public.

Why did Q4 agree to this deal?

Maintaining public status incurs substantial time and cost overheads, hindering long-term investment. Publicly traded companies often grapple with shareholder pressures focused on short-term results.

Transitioning to private status enables a focus on long-term outcomes, fostering investments for a more robust and valuable company than achievable in the public sphere. Approximately 34% of Q4 shareholders are opting to "roll over" their shares into the private entity, committing to hold until the company goes public, gets acquired, or issues a substantial dividend.

Is this a new trend?

Amidst the tech boom, 20 companies debuted on the TSX, but Q4 marks the sixth delisting. Preceding Q4, two were acquired below their IPO price, two went private (one above and one below its IPO price), and one voluntarily delisted from the TSX. These firms encountered substantial challenges as tech valuations declined post-boom.

The shift to private status might indicate better support for these companies compared to their public counterparts.

What is the impact on the ecosystem?

This is a reminder, that despite Nasdaq's 2023 surge, recovery is confined to mega-cap tech firms. Similarly, in the private market, gains are concentrated in a few AI companies.

With public markets cautious and multiples compressed, late-stage rounds and valuations will be impacted. Start-ups must prioritize growth and capital efficiency, given the uncertain trajectory of valuations amid AI enthusiasm and potential interest rate slowdowns.

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