Endace to shed jobs under new owner Avago, risks having government grants clawed-back
By Fiona Rotherham
Sept. 23 (BusinessDesk) - New Zealand-founded Endace, which develops technology that measures, monitors and protects high-speed networks, is understood to have laid off about two-thirds of its workers, a move that could potentially trigger claw-back provisions for government research and development funding.
The company formed in 2001 to commercialise research out of University of Waikato, was sold for $154 million in 2012 to Californian networking solutions firm Emulex, which in turn, was sold in May to Nasdaq-listed Avago Technologies for US$587 million.
Singapore-based Avago, which is a global leader in the analogue semiconductor market, has decided Endace is not part of its core business and flagged it as being up for sale in its third-quarter accounts. It valued Endace at just US$34 million (NZ$53.8 million) which is $100 million less than it was sold to Emulex for just two years ago and Avago booked a US$4 million income loss from what it described as a discontinued operation.
Sources say Avago has given Endace an earnings before interest and taxation target it needs to reach before being put up for sale, and to achieve that it will slash staff numbers by about 100 people in New Zealand and the US. Endace general manager Stuart Wilson said he couldn't comment and referred BusinessDesk to Avago's public relations team, which didn't respond to questions.
When sold to Emulex, Endace had 117 out of 180 staff based in New Zealand, of which 80 percent were focused on research.
That sale led to a spat between Endace co-founder Selwyn Pellett and Economic Development Minister Steven Joyce over the $11.1 million in taxpayer funding it had received. Pellett was concerned the company was being sold to overseas interests without having to repay the grants, even though he personally benefited from the deal as a shareholder.
Joyce said the government was trying to encourage R&D in New Zealand by funding companies that continued to do that work here regardless of ownership.
Claw-back provisions were subsequently introduced to the criteria for R&D grants that state businesses may be expected to return some or all of grant funding if they “enter into a contract or arrangement, including change of ownership, that materially reduces the current or future planned R&D activity in New Zealand”. The claw-back provisions remain in place for three years from the end of the grant contract.
Endace has received three separate government grants. The first was a $4.4 million investment grant from TechNZ in July 2010 and the second was a technology development grant in December 2010 worth up to $6.7 million over three years. It has also been paid $1.8 million so far under a growth grant awarded in October 2013 that potentially has a total contract value of $6.8 million.
Callaghan Innovation, the government agency that now hands out R&D grants, said it had been “working constructively” with Endace to determine its on-going eligibility for the growth grant following its restructure. “We anticipate Endace will continue to provide updates, and until we know more we are not in a position to make any definitive statement on the status of grants paid to it,” a Callaghan spokesman said.
Callaghan Innovation director Mary Quin said this month that it was investigating seeking at least part repayment of grants it had made to two companies under the claw-back provisions.
One of those is failed Auckland network security company Mako Networks, which was placed into liquidation last month. It has drawn down $1.4 million of a technology development grant. The first liquidator's report shows the company's estimated statement of affairs is a deficit of $25 million, with Spark New Zealand believed to be owed $26 million. It's unknown at this stage if any distribution can be made to unsecured creditors. Callaghan hasn't identified the other company.
The only time Callaghan has invoked the claw-back provisions is for the $332,967 the agency is seeking to be repaid by Trends Publishing after it had an R&D grant cancelled earlier this year.
The Auckland magazine publisher is suing Callaghan for economic losses suffered over the grant's cancellation which followed an agency audit of its funding claims. Trends owner David Johnson said the amount of compensation he’s seeking was still being calculated but he was pursuing the High Court claim. He’s denied any breaches of the terms of the grant, which he’s refusing to repay.
Last year the government investigated whether it could recoup any of the more than $3 million in R&D funding awarded to Canadian-owned, New Zealand-based technology firm Next Window that was shut down.
The developer and manufacturer of optical touch screens was award a $5.9 million, three-year R&D grant in 2011, the year after it was bought by Smart Technologies for US$82 million. It received $2.6 million of that grant, plus an additional $550,000 in other state-funded R&D grants.
Before the acquisition Next Window had employed around 80 staff, many of them in R&D, in Auckland but that number had fallen to around 11 by the time it was closed.
Callaghan said it decided not to pursue a claw-back for a number of reasons, the most compelling of which was the company’s technology had been superseded and therefore no benefit accrued to another company from acquiring it. Next Window’s R&D staff were also employed by other kiwi companies within days of shutdown so that capability was retained in New Zealand, the agency said.
(BusinessDesk is paid by Callaghan Innovation to cover the commercialisation of innovation).