There’s no shortage of winners from Verafin’s pending sale to Nasdaq, and one of the big ones is the government of Newfoundland and Labrador. The provincial government may haul in $100 million from the deal at a time when it could really use the cash.
St. John’s-based Verafin, the anti-fraud software maker, agreed last month to be taken over by Nasdaq, for US$2.75 billion in cash. They also agreed that the merged company would continue to grow the anti-fraud and anti-money-laundering software business in St. John’s under Verafin’s current management.
A big chunk of that money is going to St. John’s residents, which means another hefty slice will be collected by the taxman. And that’s another win from this deal for two reasons: first, federal and provincial treasuries need revenue because they’ve been ravaged by the recession; and second, this event can help to convince Finance officials that a strong innovation sector benefits everyone, including government coffers.
I don’t have any first-hand knowledge of how much money the deal will produce in taxes, but it’s not hard to come up with a back-of-an-envelope calculation. First, Nasdaq said it would pay US$2.75 billion in cash for Verafin, which translates into about C$3.6 billion in Loonies.
Verafin said in September 2019, when it closed a $515 million equity-and-debt funding round, that the company’s “co-founders, management and employees” collectively represent the largest shareholder group. Not that they hold a majority stake, but they’re a larger group than any other investor.
Let’s say they hold one-third of the company’s shares, which would be valued at about $1.2 billion according to the deal announced last week.
They will have to pay capital gains tax on about half that, which would be $600 million. If they pay a tax rate of 40 percent (which is probably conservative), they would collectively pay $240 million in taxes.
If that is divided 60-40 between the federal and provincial governments, it would mean the government of Newfoundland and Labrador would receive about $100 million after the deal closes next year.
Could I be off by several million? Sure could. There's a lot of supposition in this analysis, but whatever the number is the fact remains the government of Newfoundland and Labrador is in for a windfall. I’ve run this by a couple of accountants and they concur a figure of $90 million to $100 million would be reasonable.
(That’s not bad when you consider this company employs 500 people. If they’re earning an average of $60,000 a year – again, a conservative estimate – then the government of Newfoundland and Labrador is probably collecting more than $6 million in taxes a year from this group, regardless of the Nasdaq-related bonanza.)
Returning to the Nasdaq deal, let me put that $100 million figure in perspective. In April, the provincial government forecast it would raise $4.5 billion in taxes and other sources within the province. That’s down from $5 billion the previous year because of the pandemic. So the NL Finance Department is likely looking at windfall from Nasdaq that will bring in the equivalent of one-fifth of the current revenue shortfall.
The timing couldn’t be better for the NL Treasury to land this jackpot, and not just because of the pandemic. There are various efforts in the region to improve the funding of startups, and one group that needs convincing is provincial Finance officials. In Atlantic Canada overall, there are efforts to liberalize investment tax credits for startups. And in Newfoundland and Labrador in particular, there have been talks about the need for a second Venture NL fund.
The Verafin deal is a clear demonstration that a strong ecosystem for high-growth, innovation-driven companies benefit not just the economy overall but can be a boon to provincial coffers.