Industry Committee on Aug. 7th, 2009

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair, and thank you, gentlemen, for appearing.

Who actually created the non-disclosure agreement? Who set that agreement and put it in front of you?

[Mike Lazaridis]

My understanding is that it was Nortel's U.S. counsel.

[Brian Masse, NDP, Windsor West, ON]

Okay, so let's be clear on that: it was Nortel's U.S. counsel that set up the blocking, or the change of reference.

One of the things I'm concerned about--and I have raised this issue and I think there's enough evidence for this to actually be reviewed under the Investment Canada Act--is that, interestingly enough, Nortel believes what it's selling has a book value of around $149 million U.S., after receiving an offer of over $1 billion. I find that a stretch. What's the asset worth to you in terms of your analysis? Is it the $149 million, or is it something different?

[Mike Lazaridis]

We've clearly, publicly, told you our belief of the value of those assets, based on our public bid. I would find it hard to believe that all those assets and all the rights to the other assets—and that's the key—are only worth $150 million.

[Brian Masse, NDP, Windsor West, ON]

You'd have to wonder, as an Ericsson shareholder, if that's the real value, if Nortel is saying they got $1 billion for a $150 million transaction.

In terms of national security, this is a very new clause, something I've been after since 2003, when there was the issue over China Minmetals Corporation and whether we should have non-democratic state governments owning Canadian companies. What I'd like to know is, in terms of the BlackBerry and the encryption, how important is that for its applications and how important is that as a feature to actually sell that in the market in Canada but also abroad?

[Mike Lazaridis]

Without question, it is important to understand how important security technology is. The technology that we use, of course, is public key elliptic curve technology. We've been using it for years, and it's been one of the core competitive advantages we've had in the BlackBerry and why it's so widespread in government use, military use, and law enforcement use.

It's interesting you should mention that, because last year we purchased another great Canadian company called Certicom. It was a Canadian company purchasing a Canadian company, a Canadian company purchasing a Canadian company that had already licensed a lot of their technology and had already been using a lot of their technology. It looked like a perfect match, and yet it was still reviewed by the U.S. under national security conditions before the transaction could complete.

[Brian Masse, NDP, Windsor West, ON]

That's interesting, because it's a very unusual case where you have another state government review foreign purchases internally. Over here, I'm hoping that this is triggered as well. I think it merits it.

Also, it's important to note that there's no monetary threshold for the national security review. So that people are aware, the minister has two separate processes. He has the net benefit to Canada clause, and that has been tested recently. We've seen U.S. Steel, for example, where the Canadian government had to bring them to court because, even in spite of conditions being put on them, they've pulled back from those conditions. Separate and independent from that is the new national security provision that's available.

I want to switch quickly to another gear with regard to branch plant development versus that of home plant development, research and design and so forth. Where does most of that take place in terms of patent development and then bringing it to market? Does it take place in a home plant or does it take place in subsidiary or branch plants?

[Mike Lazaridis]

That's a good question.

In my experience with RIM and other organizations that I've cooperated with in the past, much of the R and D and much of the innovation happens near their headquarters or in their country of origin, mainly because there's a historical condition there. There's also, in many cases, financial advantages to that. I think that in itself is an important point, because most of the people end up being concentrated near headquarters. It's simply much more efficient that way. Obviously, much of the innovation and much of the work will be done near headquarters or in their country of origin.

I think it's also important to understand that when you think of net benefit you can't only look at the accounting numbers, because there's all the value in the technology, there's all the value in the spinoffs, there's all the value in the continued innovation by those individuals within the country and within Canadian companies. You really need to expand the net benefit. You also have to look at what the net benefit is to those companies, the other companies, should that technology have a change of ownership. And how does that affect the local industry as well? That's also very important.

[Brian Masse, NDP, Windsor West, ON]

During the testimony of Nortel, it became evident that the LTE technology from 1998...they claimed it was a smaller project, around $50 million when it went into development. Then in the last couple of years, despite not being able to have access to SR and ED credits, they spent over $300 million. Does that speak to the importance of this LTE technology, that the company would invest so massively into this to bring it to conclusion? Is that the real reason they would do it, or was it timing? What type of other comparative could there be in terms of that massive investment in R and D despite not being available for any tax credits? Is that a normal situation in your industry?

[Mike Lazaridis]

There are two or three questions there.

The first thing I'd like to say is that investing in R and D is absolutely critical to the success of the high-tech industry, so it shouldn't surprise people when I mention that last year we invested $700 million in R and D. That's the first thing that's important.

Secondly, a famous researcher observed that for every year that you invest in a critical technology--that becomes critical over time--the amount of investment you need to catch up to all those cumulative investments from another company, if you start today, becomes an order of magnitude greater. In other words, if you started ten years ago, your investment may seem small, but today if someone tried to get in and invest and compete with you, the investment would be massive. That's why those investments are important.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Lazaridis.

Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

Thank you, Mr. Lazaridis and Mr. Crow, for being here today. Thank you for your presentation at the beginning. I think you were very candid about the facts relating to this and in giving us your personal insights on the importance of high technology to the future of Canada.

I want to make sure with my questions that I fully understand the situation. I'm going to ask you some questions that are a bit candid in the sense of trying to make sure that I understand what we're talking about.

Would it be correct for me to say that basically what RIM, in its approach to Nortel, was looking for was to acquire the wireless assets, the CDMA and the LTE, but the patents for both technologies? Would that be a correct assessment of the situation?

[Mike Lazaridis]

In the end, that was what we offered.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Would it be correct to say that the reason you came away not satisfied was that in the end, Nortel had decided it would license the LTE technology to the winner; and of course, that also meant that the people associated with it would be going to the winning bidder, and that this would leave only the option thereafter, if Nortel chose to or decided to do some other licensing or even selling of the patents, that that was not an acceptable alternative?

[Mike Lazaridis]

Yes, that dramatically reduced the value of the LTE assets to us.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I'm going to ask you this again. You don't have to answer this, but I would be interested in knowing. Supposing the situation is the way it is now, does RIM see any value for its future in still considering to bid for licensing or even to acquire the patents if Nortel makes that kind of offer or puts that on the table?

[Mike Lazaridis]

At this point, based on the information we have--that is public--those assets have very limited value to us going forward.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Including the patents?

[Mike Lazaridis]

Yes.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Okay.

My colleague from the NDP raised the issue of national security, and I'd like to follow that up a little bit more because I didn't quite understand the details. You talked about elliptical curve technology--if I took that information down correctly. Could you elaborate a little bit more on your concern in terms of a threat to national security from Canada's point of view?

[Mike Lazaridis]

Much of this is in our brief. It's a very complex issue and it's very detailed in there.

What I can tell you is that there are many aspects of this. One is that being involved in the standards process is absolutely critical for future success in a technology--and it's really important for Canada to be involved in that. The second thing to realize is that this is a wireless IP network. Just as we protect our land-based IP networks at our borders with firewalls, this opens us up to a wireless access point that will be available across our country everywhere--anyone could connect to it. There are going to have to be some very carefully designed security technologies and standards built into this type of technology to make sure it is used for positive means and that it can be used securely by our industry, public citizens, government, and law enforcement.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you. And if I have a chance for one more, when you negotiated or when you were talking to Nortel, in your bid, which I think was reported as $1.1 billion or thereabouts for the assets, plus other assets, which I'm assuming were the patents for LTE, did you speak about your position with respect to specific intentions on the jobs of the Nortel people who would be involved in this transfer?

[Mike Lazaridis]

The first thing that's important here is that we were given very little time. Once we learned that the rights to the assets were given away with such broad terms, we had very little time to react. Nortel knew what we were interested in, and they were very interested in our acquiring those things. Then, as more and more surprises arrived, we realized that more was available, so we expanded the scope of our offer, expanded the scope of the purchase. We did not expect that in the end we would have to make such a large bid in a situation where we were precluded from purchasing what we started our proceedings with Nortel with in the first place.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Lazaridis and Mr. Garneau.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair.

Thank you, Mr. Lazaridis.

I want to come back to this process again. For clarity, are you contending that Nortel deliberately jigged the process in such a way that it would exclude RIM for some reason?