An Ottawa-based software company believes its path to positive cash flow is in the acquisition of a local data centre and co-location business.
Leonovus announced last week it has signed a letter of intent to acquire Kanata-based PureColo in a cash-and-share deal worth $3 million, plus the assumption of $500,000 in debt. The acquisition is contingent on due diligence and approval from the TSX Venture Exchange, as well as on Leonovus raising $5 million to finance the purchase.
PureColo has been a rising star in the Kanata tech space, earning itself a Bootstrap Award last year and recently undertaking plans to double its footprint to attract more larger-scale companies to peer at its co-location facility, where numerous clientele can share data centre infrastructure.
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But while PureColo has been on the rise, Leonovus has been struggling to build any such momentum for the past few years. The company, which develops software to help enterprises optimize and manage their data storage, has failed to secure a reliable cash flow. A series of consecutive quarters without revenue has seen the company’s stock price bottom out to two cents.
Leonovus said in mid-2019 that it would need to bring in new cash or explore strategic alternatives before the end of the year.
It was a separate connection through a third Ottawa tech firm that ultimately put Leonovus and PureColo in touch.
Leonovus CEO Michael Gaffney and PureColo CEO Rainer Paduch both serve on the board of Ottawa’s Intouch Insight. Paduch says that between Intouch meetings, he and Gaffney would talk about the ins and outs of their businesses to strategize their own ways forward.
“We’ve been chit-chatting actually for almost half a year, if not more, about how to reposition Leonovus,” Paduch says.
The steady growth at PureColo makes the appeal of the Kanata company obvious for Leonovus, which needs a reliable source of revenue. Then, there’s an opportunity to add Leonovus’s product streams as value-added services on top of the co-location offerings – helping PureColo’s legacy clients to better manage their data storage.
In a statement, Gaffney said he’s also excited about the market opportunity presented by “edge co-location.” The basic concept behind edge co-location is that the speed data can move is finite, so the closer data is to where it needs to head, the faster it will be delivered. Therefore, taking advantage of co-location facilities that operate closer to a company’s offices will mean lower latency in data processing and content distribution – markets where hundredths of a second are increasingly invaluable.
For PureColo, the acquisition offers access to capital and expansion opportunities. The company is eyeing secondary markets similar in size to Ottawa, as well as the separate boroughs of Toronto, as landing points for a new co-location facility.
“There’s a long list of places that we’d like to go to,” Paduch says.
Internal discussions between the soon-to-be-merged companies have given Paduch confidence, though he’s tight-lipped about specifics given Leonovus’s regulatory standards as a public entity.
He says he evaluated the acquisition proposal with a simple business philosophy: What will give the most value to my shareholders?
“My shareholders will get some good value,” he says of the proposed deal. “And if the strategy works out, we’ll get even better value in the future.”