Endace bid bad news: founder

Selwyn Pellett believes Endace could have spawned more New Zealand companies. Photo / APN

Selwyn Pellett critical of takeover bid by US company.

New Zealand taxpayers - who have put millions of dollars into tech firm Endace - should not be happy about its impending takeover by a United States company, says its co-founder.

Auckland-based Endace, which develops technology that measures, monitors and protects high-speed networks, has been approached by California networking solutions firm Emulex with a cash takeover offer worth US$130 million ($156.76 million).

Endace was formed in 2001 to commercialise research out of University of Waikato and listed on a submarket of the London Stock Exchange in 2005.

The company has offices in the US, Britain and Australia and performs its research and development in New Zealand.

Emulex chief executive Jim McCluney said yesterday that he intended to expand local operations and create a "centre of excellence" for research in this country if the takeover happens.

He had met with senior government officials this week to discuss some plans, but would not reveal who. "I gave commitments that we're going to be here and we're going to expand and probably be looking for more opportunities for programmes and projects here in New Zealand."

The Emulex boss said the company could help Endace double its revenue, some of which would be reinvested back into research and development.

Of Endace's 180 staff, 117 are based in New Zealand.

Of these 117 workers, 80 per cent are focused on research.

While Endace's new potential owners were talking expansion, company co-founder and former chief executive Selwyn Pellett said the takeover offer was not good news for Kiwi taxpayers.

"Institutional investors will be very happy. I suspect the staff who have stock options will be very happy, there's a lot of people who are happy about this.

"People who shouldn't be happy if they understand the implications are the New Zealand taxpayers. They should be saying, 'That was one of the highest-tech companies in New Zealand, it could have with appropriate encouragement spawned another four or five companies' ... the company itself has so much IP [intellectual property]," said Pellett, who stepped down from the firm in 2010.

Endace has had two separate grants from the Government.

The first was a $4.4 million investment grant from TechNZ in July 2010 and the second, in December of that year, was a technology development grant worth up to $6.7 million over 36 months.

Pellett said there were problems with the government grant system.

Instead of grants, he believed the Crown should be putting money into companies as a convertible note, which could be turned into equity during a takeover event such as this.

If $10 million from the Endace deal was to go back to the Government, it would not be a "deal breaker", Pellett said.

"But $10 million goes a long way to funding the next Endace."

Endace's current boss, Mike Riley, said if the sale went ahead tax revenues would be going back to the Crown.

"At the end of the day every employee based here in New Zealand is a taxpayer and every new employee we add to the payroll is a taxpayer and the employees ... who have stock options in this company will be paying tax," Riley said.

Minister of Economic Development Steven Joyce said Endace was already majority-owned overseas and the Government was willing to provide funding as long as R&D stayed in New Zealand.

He said if research moved overseas, the Government had options to get money back.