Nasdaq Inc. Nasdaq is buying Newfoundland and Labrador-based fraud-detection software company Verafin for US$2.75-billion in a deal that will see the company’s head office remain in St. John’s while expanding the reach of its software to banks around the world.
The transaction is one of Canada’s largest software deals to date, and by far the largest technology deal in Atlantic Canadian history. It is being hailed as a win for Newfoundland and Labrador at a time when the province is struggling with high unemployment and low oil prices, and as a coup for the Canadian private capital providers that backed the company.
“This is an acknowledgment that we can build huge things in Newfoundland and Labrador,” Verafin’s co-founder and chief executive Jamie King said in an interview.
Verafin employs about 600 people in St. John’s and its executive team will stay on to lead the next phase of growth.
Verafin sells cloud-based fraud detection and anti-money-laundering software to financial institutions across North America. The company was founded in 2003 by Mr. King, Raymond Pretty and Brendan Brothers, who met as graduate students in Memorial University’s computer-science department. It began by providing fraud-detection software to local banks and credit unions, and now serves more than 2,000 customers in Canada and the United States.
Verafin will become a key part of Nasdaq’s fraud-detection infrastructure, and the U.S. exchange operator intends to introduce Verafin technology to larger banks as well as to banking customers across Europe. In a statement, Nasdaq said that Verafin’s products will be available to nearly 250 banks, exchanges, brokers and regulators that currently use Nasdaq surveillance services.
Combatting financial fraud is a rapidly growing business, Nasdaq CEO Adena Friedman said in an interview with The Globe and Mail. Criminals are becoming more tech-savvy and regulators are asking financial institutions to do more to root out criminal financing activities, insider trading and market manipulation.
“The regulators really are putting the banks on the front lines here, and putting more obligation on them to be the crime fighters themselves,” Ms. Friedman said.
“That puts a lot of pressure on the banks to solve this problem. The estimate is that they spend about $42-billion trying to manage financial crime within the banking system, and about $12-billion of that is spent on tech today, and it’s growing at about 17 per cent a year,” she said.
Nasdaq is financing the deal with a combination of debt and cash on hand. The purchase price, at 19.5 times expected 2021 revenue, reflects Verafin’s rapid expansion, with a compound annual revenue growth of approximately 30 per cent over the past three years. Nasdaq expects Verafin to deliver more than US$140-million in revenue in 2021.
Verafin’s financial backers will see a generous payday when the deal closes in early 2021, in what will be the largest private-equity exit to date for a Canadian software company. The deal is also the largest Canadian software takeout since IBM bought Ottawa-based Cognos for US$4.9-billion in 2007.
Major backers include Toronto-based Information Venture Partners (IVP) and U.S. growth-capital company Spectrum Equity. Other institutional investors, including fund-of-fund investors Northleaf Capital Partners, Teralys Capital and BDC Capital, are looking at substantial gains after participating in a $515-million financing round in 2019 that valued Verafin at around $1-billion, well below Thursday’s takeout price.
“This is validation that you can build great technology companies in Canada, anywhere in Canada,” said IVP co-founder and partner Dave Unsworth.
Financial technology has emerged as one of the strongest subsectors of the Canadian innovation industry, with significant investment from the likes of Caisse de dépôt et placement du Québec, Power Corp and Canada’s large banks. Last month, for instance, Wealthsimple Technologies Inc. attracted $114-million from two of Silicon Valley’s best-known venture-capital companies in a deal that valued the online financial-services company at $1.4-billion.
Mr. King called the Verafin deal “a huge win for our technology ecosystem in the province,” and a demonstration of how much the software sector has grown in Newfoundland and Labrador over the past two decades. Verafin itself has been a large part of that story.
“They’ve more or less been hiring the full graduating class of Memorial’s computer-science department for a number of years,” said Paul Preston, CEO of the Newfoundland and Labrador Association of Technology and Innovation. He added that engineers and developers trained by Verafin have “filtered out to other companies as well.”
Nasdaq said in a news release that it plans to work with Memorial University on scholarships, co-op programs and fellowships for graduate students. It is also investing US$1-million in a research and development partnership with the Genesis Centre, a local innovation hub.
Gordon Pitts, author of Unicorn in the Woods: How East Coast Geeks and Dreamers Are Changing the Game and a former Globe reporter, called the deal a “defining moment for the Atlantic Canada technology sector” which “proves the region can play in the big leagues.”
“But there is also something a bit tragic about it,” he wrote in an e-mail. “Despite all the good assurances of St. John’s remaining the head-office city, it means we have lost another Canadian champion, with the potential to be one of the foundations of a homegrown technology sector with oomph and significance.”
In a week when it was revealed that BlackBerry had put most of its patents up for sale, “it signals Canada’s continuing farm-system status. Government, and all Canadians, have to be concerned we don’t have buyers to step up for these treasured national assets,” he wrote.
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Mark Rendell
Sean Silcoff