Stephen Sorocky was appointed CEO of Waterloo, Ontario-based
Virtek Vision. Fresh from a successful turnaround of
a small VC-backed Toronto-based instrument company, Stephen
brought a breadth of experience developed at firms such
as EDS and Spar Aerospace where he rose to run one of
the firm’s most successful
Virtek Vision is a $53mm per year
technology spinout founded years earlier by two University
of Waterloo professors. Publicly traded on the TSX, the
had been uneven and its stock had steadily declined from
a high of $7.00 per share several years earlier to a low
of under $0.40 when Stephen joined the firm. The Board
of Directors gave Stephen a strong mandate to quickly identify
the firm’s underlying challenges, recommend sweeping
changes, and drive the firm to consistent revenue and earnings
Events of the ensuing six
months however caught everyone by surprise and took the
firm down an altogether different path of hostile takeover
attempt, restructuring and eventual sale to NYSE - listed
Gerber Scientific of Connecticut.
Bob Hebert sat down with Stephen Sorocky to discuss the
lessons which Virtek Vision holds for all small-cap publicly
What were the circumstances
around you being hired as CEO?
I was hired by the board to make
some hard decisions in a firm that was struggling to find
The company had two businesses. The first
was a laser imaging and templating business which was profitable
but considered low growth. The other was a laser marking
and engraving business. This
was initially an investment made in a German-based entity
which was subsequently bought outright. The business was
considered high potential though it continued to lose money.
Virtek lacked a strategy. Virtek had a history of inconsistent
profitability. It also had a tendency of moving in and out
of businesses. Some of these, such as a biotech venture they
pursued several years ago, were considered initially as exciting
and high growth, only to subsequently falter and be sold.
The stock price had mirrored these ups and downs, having
been as high as $7.00 per share during the biotech euphoria
and languishing at around $0.40 per share when I arrived.
To make matters worse, the firm had raised additional funds
the year before at $0.85 per share and a lot of shareholders
were not happy.
What did you find on arriving at the firm?
I arrived in January of this year and in short order observed
two major themes.
First, the company had no discernible marketing or market
strategy. It seemed that they would get in and out of businesses
without spending a lot of time to really understand the business
or the amount of money it was going to take to develop them
or the markets they were addressing. It was opportunistic
Second, the company had a culture based on top-line revenue
growth. To the best that I could figure it out, this started
when they got into the biotech business. This was a period
of some frenzy and euphoria. The stock shot up to $7.00 per
share and everyone had big expectations of growth. To reward
those expectations, there was a focus on top line revenue
growth. People were compensated and even incented on sales
and all the systems lined up behind. Even the CFO had his
bonus when originally hired, if you can believe it, tied
to top line growth.
The effect of this of course was that sales pursued contracts
at any margins and solutions to every sales problem were
framed in terms of pricing. Functions like engineering were
driven by the opportunity de jour or short term win considerations.
Managers did not have a set of metrics by which to justify
long term investments and thus few were undertaken.
When I asked people to show me what reports
they were using to manage the business there were very
few used relating to G&A, or cost of goods. It was
all about revenues. This is why profits were so inconsistent.
Some years they did well while other years they got killed.
It was guaranteed to always be a surprise.
This sales driven culture was not hard to identify and within
six weeks I implemented a wholesale change to the compensation
system of the whole management team. I introduced new financial
metrics, and made sure the systems and incentives drove the
appropriate behavior to move the company towards consistent
How did you deal with the marketing issue?
The marking and engraving business unit always loved to
speak of their $3 billion addressable market. But there was
no data or breakdown of segmentation by which to guide our
growth. No one really understood where we fit into the overall
marketplace and thus it was impossible to challenge assertions
of how we were doing.
I engaged an outside firm to quickly segment the market
for us. We articulated six profitable segments in which we
had a presence and which had a 15% or greater growth rate.
The $3 billion market became a $230mm market that was truly
addressable by us today. We then aligned our sales force,
our collateral, our product management to these markets where
we could speak of clear competitive advantages. We were also
then in a position to look longer term at adjacencies and
The imaging and templating division was also operated on
a set of assumptions. It was considered a division with limited
growth potential and as a result being milked. But to me
these assumptions were untested. The firm was primarily operating
in the US market and many of its aerospace customers had
or were in the process of shifting manufacturing offshore
where we were simply not effectively pursuing business. It
seemed to me that there was potentially a whole world of
market opportunities that may have been untapped and so we
started to look into how we might expand our market footprint
through new sales initiatives and channels.
What happened next?
Between January and April we had
done lot of the work to understand the business and set the
stage for the turnaround. There was a board meeting scheduled
for July and we were well underway to having developed a
very attractive, very predictable growth plan for the company.
It should also be noted that we had also given some thought
to the broader positioning of the company as a publicly traded
entity. Small publicly traded companies like ours are often
orphaned in the markets. We only had one analyst covering
us and our trading volume averaged 20,000 shares per day.
We were very illiquid. We needed to regain credibility by
adding consistency to the business. Earnings quality was
going to have to be established brick by brick and I knew
we had the plan.
I was very excited. We were a company trading at $0.41 per
share with $0.25 per share in cash alone and two pretty interesting
businesses with a lot of potential. Some of the early changes
we made would immediately stabilize the business and our
plans going forward were reasonable and achievable.
But then things suddenly changed. Can you explain?
Did they ever! One of our investors happened to be at a
conference and struck up a casual conversation with one of
the speakers, the CEO of a company called StockerYale Inc.
This was a US-based, publicly traded laser company which
on the surface appeared to share similar challenges to our
own company. The discussion was benign.
Shortly afterwards however, I received a visit from the
CEO of that organization wanting to explore the possibilities
of a friendly takeover. He spoke of the benefits of two small
cap companies merging, the reduced costs of only having one
public listing, the $100mm in revenues of the combined companies
and the greater attention the firms would attract in the
As I began to think about this proposition
and looked into the other firm I grew increasingly concerned.
The firms were in unrelated segments of the laser businesses
and there were few synergies that I could see. Plus, their
firm was losing $5mm per quarter and it wasn’t clear
to me at all how they would even finance such a transaction.
Finally, certain past legal proceedings against principals
of the firm also gave me grave concern about the fit with
our organization and people. The only thing that I knew
for certain was that the $7mm we had in cash was tantalizing
to this other company.
What happened next was also concerning.
Someone began buying stock in the firm in volumes that
were unusual. The stock began to move up and triggered
attention. Though we could not tell or prove who was doing
it, it seemed designed to force our hand in disclosing the
casual expression of interest by StockerYale. That effectively
put us into play.
What did the Board do?
The board announced the expression of
interest and took the position that with $0.25 in cash,
offer of $0.65 per share was a non-starter. Stocker Yale
responded by initiating a hostile takeover bid for Virtek.
We now had 60 days to respond. We formed a special committee
to consider the offer. We engaged an investment banker. Though
it sounds unfair, one of my lessons from this whole process
is that once advisors and investment bankers get involved
it is hard to go down any other path than the sale of the
In any event, we began to look at our options. Perhaps we
could dividend the cash, or buy-back shares or maybe sell
the imaging and templating division. As we thought about
it, this last option started to make a lot of sense. This
was a profitable business which alone was likely more valuable
than the offer that was made for the whole business. We could
sell the business, use the money to buy-back stock through
a substantial issuer bid, in the process bettering the StockerYale
bid. It would also leave us with a pure play in the laser
marking and engraving business which would focus our business
on a high growth market and was encouraged by a number of
our investors. Everyone would benefit.
Our investment bankers found two potential
buyers. The first was MiTek which was a customer of ours
and a subsidiary of Berkshire Hathaway. The other was Gerber
Scientific. In the final analysis MiTek won with a bid
of $25mm. We were quite excited for in a short period of
time we had gone from a $14mm market cap to $32mm in cash
plus a pure play business to go forth. This was about $0.94
per share. We also reached agreement with Royal Capital
to invest a further $3mm in support of the growth of the
But before we had the required meeting
with Shareholders to approve the deal, Gerber called back
and said that since they had lost the bidding for the one
division, they would now like to buy the whole company
at $1.05 per share. MiTek declined their option to match
the bid when they learned that it was Gerber and not a
competitor of theirs. They could still have access to our
products as they had up until now with our current relationship.
Ultimately over 93% of Virtek’s
shareholders tendered their shares in November to the Board
supported offer by Gerber.
What are the lessons you take away from this?
First, it is important to communicate, no let me say over-communicate
with your shareholders. We had a company worth a lot more
than it was valued. But past management had lost the shareholders
confidence and thus they were willing to respond favorably
to the short term liquidity opportunity and value increase
from an offer that they might otherwise have summarily dismissed.
I was a new CEO and though I could see the possibilities
four months was not sufficient time to show the results of
my plan and earn shareholder confidence and we paid for that
in the final analysis.
Well, I realize now that our situation
was somewhat predictable and that we should have anticipated
it. I do not mean that the ultimate outcome was predictable
but rather that an illiquid company trading at $0.41 that
had $0.25 in cash was vulnerable. We should have talked about
the various scenarios that might come to pass. We should
have had advanced defensive plans in place, a team ready
in the wings, and a set of contingencies in the event that
things went offside and we faced the short timelines and
constraints of a publicly traded company. Once an offer is
tabled, a whole range of options is taken off the table as
you have to respond as per the regulatory rules.
I would even say this applies to a VC-backed
company which is what I managed before joining Virtek.
These are unusual times in that community and if I were
running a startup with $8 or $10mm sitting in the bank
from previous rounds, I would be very careful. The rules
of engagement could all come crashing down as investors
scramble to deal with a bunch of issues such as the need
for liquidity and the limited opportunities to realize
upon their investments in today’s economic
Another observation pertains to the Board
of Directors. We had an effective board with a good chairman
who facilitated the whole process and a number of Board
members who had experience in takeovers. I would advise
companies to make sure that they have someone on their
board with experience in M&A
situations and who can bring a steady hand to the proceedings.
Finally, I would suggest that companies select their advisors
very carefully. Be careful what you write down as the objectives
for an investment banker. Ensure that they are incented and
paid in line with objectives of the Board and shareholders
appropriate to opportunities present and constraints in a given
situation. If it is transactions that they are paid most generously
for then you can reasonably predict that you are going to see
a transaction of some sort.