Endace sale stokes debate over funding

Selwyn Pellett said there were problems with the grant system as it did not return funds to the Government's coffers. Photo / APN

The takeover bid aimed at tech firm Endace has revived debates around the sale of taxpayer-backed companies to foreign players.

As news broke this week that Auckland-based Endace has been approached by Californian firm Emulex with a cash takeover offer, its co-founder Selwyn Pellett said New Zealand's taxpayers should be unhappy with the sale.

Endace, which develops technology that measures, monitors and protects high-speed networks, has received two Government grants, one for $4.4 million and another worth up to $6.7 million

Pellett, who left the company in 2010 but still holds a small shareholding, said on Thursday there were problems with the grant system as it did not return funds to the Government's coffers.

The entrepreneur said public money should go into companies as a convertible note, which would turn into equity upon a takeover or similar event.

This would allow the Government to get money back without having to take on the responsibilities of being a shareholder in a company.

"You take no responsibility for the governance [and] you take no responsibility for what happens," Pellett said. "You put the money in and say, 'I trust you to do a good job and, by the way, if you do I'm going to come knocking on your door and get some back'," he said.

"It's an instrument that most VCs [venture capitalists] and angel investors use."

Rod Drury, chief executive of online accounting software Xero, said yesterday that most businesspeople would not have a problem with a convertible-notes system.

"From a purely philosophical point of view if you've taken taxpayer money it should be part of the contract that if you sell more than say, half the business, that you pay that money back so it can be recycled for the next companies to use," Drury said.

Xero got a $4 million government grant in 2010 and Drury said the company applied because one of its biggest competitors at the time received similar public-sector assistance.

Minister of Economic Development Steven Joyce said Endace was already majority-owned overseas and so the takeover would simply be a change of ownership.

"Should the Government be funding companies that are owned offshore? I think the answer is yes, provided that the R&D that we're seeking to encourage actually occurs in this country," he said.

Emulex indicated this week they would seek to keep Endace's R&D in New Zealand and wanted to expand local operations.

But technology commentator Peter Griffin said in a blog yesterday that others had made similar commitments which later changed.

"What we have discovered when our tech companies sell is that, despite best intentions, the R&D operation is unlikely to remain in New Zealand long term," he said.