Funding issues in spotlight as Endace's new offshore owner cuts 100 jobs

UPDATED with comment from Steven Joyce. See end of story.

Sad news today that Endace is axing more than half its staff.

The tech company's dramas over the past couple of years illustrate some of the key issues with matching research and development funding from Crown agency Callaghan Innovation and its predecessors.

It should reanimate debate over whether Labour's proposal to halve funding for pick-a-winner outfits like Callaghan and return to an across-the-board tax break for R&D is the way to go (yes, you'd expect that National would be in favour of the universal tax rebate and Labour arguing for hundreds of millions in direct subsidies, but that the topsy-turvey situation we're in).

Based in Auckland and born out of research at Waikato University, Endace makes hardware and software for monitoring network traffic and network security in real-time without impacting a network's performance.

In late 2012, US company Emulex proposed a takeover. It gained Overseas Investment Office approval in February 2013 and closed the $156 million deal by April.

Along the way, Emulex chief executive Jim McCluney met with economic development minister Steven Joyce and media. He made encouraging noises about keeping jobs in New Zealand. But when NBR asked him for a black-and-white pledge he demurred. And, really, what else could he do. Mr McCluney could not speak for future management or indeed as it's turned out a future owner. In May, Emulex was in turn sold to Nasdaq-listed, Singapore-based Avago Technologies for $US587 million.

The sale generated controversy thanks to a Twitter war between Mr Joyce and Endace's founding CEO and shareholder Selwyn Pellett. Although he personally profited from the sale, the entrepreneur said Crown funds should have to be paid back in teh event of an offshore sale. He fretted that US-based Emulex would now reap the profits from taxpayers' R&D investments.

Mr Joyce' argued that Callaghan's matching grants were all about encouraging R&D activity in New Zealand. It did not matter if a grant recipient was NZ owned, sold offshore or part of a multinational. He also quietly tightened things up, ushering in a new Callaghan funding provision, previously lacking, for a recipient to pay back the past three years' of grants if it moved R&D activity offshore (as first revealed during an NBR AMA).

Callaghan boosters have also argued that when a company is sold offshore (as so many have been) the owner typically re-invests the money locally, often in tech startups. And that has been the case with Mr Pellett, who has ploughed money into ventures including telematics company Imarda.

Still, Endace staff won't be particularly open to that argument today.

At the time of its 2013 sale to Emulex, Endace had 117 of 190 staff in New Zealand. Its new owner Avago won't comment, but sources say 100 are getting the chop.

The hundreds who used to work for Navman and NextWindow will be able to sympathise.

In the year to June 30, 2014, Endace loss tripled to $US22.5 million on revenue that nearly halved to $US23.4 million. However the company said that with its incorporation into Emulex, its 2013 vs 2014 numbers were not an apples-to-apples comparison.

Joyce responds
Mr Joyce, currently in China, emailed NBR that: "The discussions referred to were with Emulex, which has since been sold to another company." 

That's correct, Emulex was in turn sold to Avago. But any company with a Callaghan grant can be sold. So I guess the lesson here is that any promises around jobs and local R&D are only good until that point (and bear in mind that amid all the dozens of sales and departures from NZ, Callaghan has only clawed back funds from Trends Publishing, and that that was over allegations referred to the Serious Fraud Office rather than an issue over where co-funded R&D was taking place).

Mr Joyce also said, "Callaghan Innovation is currently working with Endace to determine the impact of the ownership changes on the eligibility of the company for R&D Grant funding and whether the clawback provisions of the R&D Growth Grant would apply.

"These sorts of ownership changes and direction changes can happen from time to time in the relatively fast-moving hi-tech sector. The government’s focus is always on the level of R&D activity being conducted by companies in New Zealand, and the benefit New Zealand." 

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