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Hyatt Brothers Strike Again: Toronto Tech Entrepreneurs Sell BlueCat Networks for $400-Million

Hyatt Brothers Strike Again: Toronto Tech Entrepreneurs Sell BlueCat Networks for $400-Million

Michael Hyatt became a self-made millionaire by building two highly successful tech firms valued in the hundreds of millions. Today, Michael ranks as one of Canada’s top entrepreneurs, is a celebrated “Dragon” on CBC’s online sensation Next Gen Den, and is a weekly business commentator on The ExchangeOn the Money, and The Business Panel. He is also an active investor and philanthropist. Speaking on leadership, innovation, entrepreneurship, the future of tech, and managing change, Michael believes that no matter what the topic, we need to embrace change, because, as he says, “change is good”. It has just been announced that Michael and his brother have sold their company BlueCat for a whopping $400 million:

One of Canada’s most successful emerging technology companies, BlueCat Networks, Inc., has been sold for almost $400-million to U.S. private equity firm Madison Dearborn Partners LLC in the latest in a string of foreign takeovers in the sector.

Co-founders Michael Hyatt, 43, and brother Richard Hyatt, 44, will pocket the majority of the proceeds and retain a minority stake. Michael Hyatt will also remain a BlueCat director. The deal for the company, whose server technology is used by about 1,000 large corporate and government customers to connect their users and devices securely to Internet-based applications and services, will be announced Thursday.

“We’ve done fantastically well … but it was a climb,” said executive chairman and former CEO Michael Hyatt, a CBC business commentator and star of Dragons’ Den spinoff Next Gen Den. “We didn’t win the lottery.”

The BlueCat deal follows this month’s $300-million (U.S.) takeover of Montreal high-end rentals startup Luxury Retreats by Airbnb Inc. and PayPal Holdings Inc.’s $304-million (Canadian) purchase of Vancouver payments processing firm TIO Networks Corp. Also this month, QuintilesIMS purchased Halifax-based STI Technologies, a 16-year-old provider of online software for physicians and pharmacists, for a reported $200-million.

The rash of deals is another sign that Canada’s tech sector continues to heat up. Last year was one of the best years for Canadian startup financing since the dot-com boom. Meanwhile, Canada is emerging as a global hot spot in the fast-blossoming artificial intelligence scene, based around some of the world’s leading experts at universities in Toronto, Montreal and Edmonton.

Meanwhile, there hasn’t been a Canadian tech IPO on the Toronto Stock Exchange since Shopify went public in May, 2015. Earlier this month, Mississauga-based health-care software firm PointClickCare Technologies Inc. delayed its IPO plans. BlueCat had been one of a handful of other Canadian companies thought to be likely IPO candidates in the medium term.

A BlueCat IPO may yet happen, as Madison Dearborn, which has participated in buyouts of Canadian firms Clearnet Communications Inc., Q9 Networks, Inc. and QuickPlay Media, Inc., typically holds companies for four to seven years before selling or taking them public.

For the Hyatt brothers, the sale marks their second successful startup “exit,” following the sale of their risk-assessment software firm Dyadem International, Ltd. in 2011 for almost $100-million to IHS Inc. They also owned a majority of Dyadem, bringing in relatively little venture capital before selling. Rob Louv, managing director with Los Angeles-based investment bank Houlihan Lokey – and an adviser on the Dyadem deal – said it was “unusual” for founders to twice exit successful startups while maintaining majority control. “We never wanted to give up control of our fate,” Michael Hyatt said.

The Hyatts have been business partners for more than 30 years, dating to when a school-age Richard, a quiet, self-taught programmer, created video games on his Commodore 64 and the outgoing and chatty Michael hawked copies on diskettes in the schoolyard near their home in Richmond Hill, Ont.

Their next venture together came after Richard dropped out of engineering school to write code as a consultant to public hydro utilities and Michael graduated with a biochemistry degree from the University of Western Ontario with marks that weren’t good enough to get into medical school. Richard wrote a Windows program to help their engineer father manage risk assessment on complex projects. The software was so good that the brothers built Dyadem out of their family home, with Michael mailing disks to large customers and helping them install it over the phone. They generated $1-million in sales in their second year and soon counted Dow Chemical Co., General Motors Co. and BP plc as customers.

The Hyatts created BlueCat after Richard purchased an off-the-shelf domain name server in 2001 for Dyadem. It was expensive and complicated, so Richard created his own product, which was smaller and faster. “He showed me this thing … and said, ‘I bet we could sell these things,’” Michael recalls. They launched BlueCat in 2002, charging $10,000 for their DNS servers, about half the price of competitors. They sold 25 in their first quarter, with an employee making the product in an office backroom. Production and shipping is now handled by Dell Technologies Inc.

Michael and Richard stepped back from their roles as CEO and chief technology officer in 2013 and 2014, respectively, to make way for professional managers. They weren’t looking to sell, but after BlueCat’s larger, publicly traded rival Infoblox Inc. sold to private equity firm Vista Equity Partners last fall for $1.6-billion (U.S.), Mr. Louv began gauging the market’s appetite for a similar deal for BlueCat, the No. 2 player. Madison Dearborn responded with a pre-emptive offer valuing BlueCat at a premium to Infoblox, and the parties quickly reached an agreement.

Doug Grissom, managing director with Madison Dearborn, said he was drawn to BlueCat’s “high-quality management team,” the company’s solid roster of blue-chip customers and its success in helping them manage their increasingly complex web of connected devices over internal networks and external cloud-based data hosting services. In addition, he said BlueCat has a “huge opportunity” with its impending launch of a new security offering that will help clients monitor for suspicious activity in its data networks. BlueCat CEO Michael Harris said he expects the new offerings will boost the company’s revenue growth rate to more than 30 per cent annually from the current low 20s.

The Hyatts say they plan to remain active as backers and advisers to Canadian startup entrepreneurs. Asked if they have another startup in them, Michael replied: “Richard is threatening to do another company. I’m preparing my bottle of Advil right now. I don’t know, we could.”

Sean Silcoff/Globe and Mail/February, 2017