The open office space at Softchoice in Toronto in May, 2011.Della Rollins/The Globe and Mail
Softchoice Corp. SFTC-T has become the latest in a slew of TSX-listed tech companies to go private after agreeing to a $1.8-billion takeover by World Wide Technology Holding Co. LLC.
The St. Louis, Mo.-based acquisitor said Tuesday that it would pay $24.50 a share, a 14-per-cent premium to Softchoice’s Monday closing price on the Toronto Stock Exchange, as part of an effort to grow its presence in Canada.
With the deal, Softchoice, a Toronto-based IT services firm, is set to become the 11th of 20 tech companies to exit public markets after being listed on the TSX during the mid-2020 to late-2021 pandemic bubble. But unlike most other reprivatizations, Softchoice is going out above its issue price, with an increase of 22.5 per cent from the company’s initial public offering of $20 a share.
John Ruffolo, founder and managing partner of Maverix Private Equity, said there are two fundamental reasons driving the trend that Softchoice has just joined, the first being its exclusive listing on the TSX.
“When you’re just listed in Toronto, you don’t get the clear pricing of what a company is worth because there’s not enough liquidity on the Toronto Stock Exchange,” he said, adding that most successful companies are listed in both Toronto and the U.S.
The second is related to the impact of the Canadian dollar sitting at 70 US cents, as of Tuesday afternoon: “Boy, do we ever look cheap,” said Mr. Ruffolo, who expects to see more of the remaining nine public companies go private with buyers from the U.S. in the near future.
Despite the evident downturn in the Canadian tech scene over the past three years, there are also at least 71 companies, according to an analysis by The Globe and Mail, that have surpassed US$100-million in annual revenue, signifying their maturity and sustainability in the sector. And in the coming years, many of them are considering going public.
Dani Lipkin, managing director of the global innovation sector with TSX parent TMX Group, said it has been a stellar year for tech on the exchange this year and that privatizations are just part of a sector’s natural cycle.
He referenced the recent IPO launched by retailer Groupe Dynamite Inc. in November, as well as a steady stream of companies going public on TSX Venture Exchange, as examples of contributions to the positive trend he expects will continue for the tech index in coming years.
“Canada as a whole is in a much better position from a tech ecosystem and company growth perspective than we’ve ever seen in our history,” he said.
Softchoice’s largest shareholder is Birch Hill Equity Partners, which had earlier taken the company private in 2013. Softchoice filed for an IPO in May, 2021, and made a soft trading debut on the TSX in a $350-million deal that saw most of the proceeds go to Birch Hill. At the time, it said it intended to use its net proceeds from the IPO, about $77.8-million, to repay debt.
In the past 12 months ended Sept. 30, Softchoice reported net income of $52.9-million on sales of $1.04-billion, according to S&P Global Market Intelligence. Both figures represented slight declines from the results for the 12 months ended Sept. 30, 2023.
ATB Securities Inc. analyst Martin Toner, in raising his one-year target price in November for Softchoice shares to $26 from $23, said he believed Softchoice “will be a beneficiary of improving IT spending trends and will also be a market share gainer, given its exposure to the migration to the cloud and AI.” He said the company would be “ramping up growth investments” in the near-term, hampering profits, but that in the long-term, the company’s profit margins should expand.
Bank of Nova Scotia analyst Divya Goyal said in a note to clients in November that Softchoice was seeing customer growth in its commercial as well as small and medium business client segments, thanks to investments into salesforce and technical capabilities.
David Steward, founder of World Wide Technology, mentioned this growth as an asset in his comments about the acquisition on Tuesday. The deal is expected to close around the start of the second quarter of 2025, pending regulatory approvals, and comes with a termination fee of $49-million.
Before Softchoice, Payfare was the latest Canadian company from the pandemic bubble to exit public markets. U.S. fintech firm Fiserv announced on Dec. 23 that it would buy the Canadian fintech in a $201.5-million deal, as part of its efforts to expand payments offerings for gig-economy workers.