More SMEs acquiring or merging with firms abroad

Mr Wilson Teo, executive director of apparel company Teo Garments, says a suitable foreign partner should have values aligned with his company's, with similar objectives to achieve.
Mr Wilson Teo, executive director of apparel company Teo Garments, says a suitable foreign partner should have values aligned with his company's, with similar objectives to achieve.ST PHOTO: AZIZ HUSSIN

It can be more cost-efficient way of breaking into new markets, they say

MORE Singapore small and medium-sized enterprises (SMEs) are merging with foreign firms or acquiring companies overseas.

Though the process is costly, companies say mergers and acquisitions (M&A) can be a more cost- efficient way of venturing into new markets, compared with going it alone.

Trade agency International Enterprise (IE) Singapore said there is a growing trend of SMEs involved in overseas M&As.

It provides financial assistance for those pursuing M&A strategies abroad, and approved a total of $5.2 million worth of grants for related activities over the past three years, said Ms Angeline Chan, the agency's group director for capability development.

IE Singapore's Internationalisation Finance Scheme aims to address constraints firms face in getting traditional M&A funding.

Its Global Company Partnership grant covers the initial stages of strategy development and due diligence, along with valuation and post-merger integration.

Ms Chan added that last year, SMEs made up about half of the companies which received grants for M&A-related activities.

One such company is Sierra Solutions, a professional services provider focusing on information technology solutions for the healthcare industry.

In April this year, it acquired SIT-Matters SL, a Spanish firm with offices in Barcelona and Merida that does the same line of work, and renamed it Sierra Med-IT Spain SL.

"We were business partners for around three years prior and it made natural sense for us to come together as one company to leverage on each other's strength in terms of skills and talent," said Mr Ranjan Vaswani, founder and chief executive officer of Sierra Solutions.

Mr Vaswani said what he sought in a foreign partner was a relationship of trust and a common outlook. "SIT-Matters was a natural choice as they complemented gaps in our skills and experience. In addition, they give us access to the Central Europe market."

He said should his company decide to venture into Latin America, it is also useful that employees of its partners speak Spanish.

The company has since been able to expand its business network and talent pool, which is very specialised since it is focused on the healthcare industry.

Mr Vaswani said IE Singapore provided Sierra Solutions with up to 70 per cent in acquisition expenses, including fees to its local adviser as well as legal and tax advisers in Spain.

Another local firm that has opted to expand abroad this way is apparel company Teo Garments.

It is a supplier for leading brands in the United States. Sixty per cent of its revenue comes from apparel for children and babies, and another 40 per cent from ladies' casual wear.

The firm acquired a 35 per cent stake in Mad Dog Concepts, a children's apparel firm in America, in February this year.

Executive director Wilson Teo said the move "served a strategic purpose". The firm can reach retailers in the US more easily, and its ability to do product design and development is enhanced.

He added that leaving local shores was inevitable as manufacturing is much more cost efficient overseas, and there is a bigger export market.

"It also placed us in a better position to acquire new licences for patents and copyrights. For example, a recently acquired licence was for Hoodsbee, a hoodie that can be folded up into a soft toy."

While it is too soon to expect any revenue surge, Mr Teo said the move is set to bring in an additional $5 million to $8 million in revenue over the next year.

Dr Kar Wong, group managing director of Advanced Holdings, said: "IE has provided more than $300,000 over the past three years to support our overseas M&A efforts. These grants are used in the engagement of third- party professionals who assist in the M&A process."

Set up in 1993, Advanced specialises in supplying equipment for the oil, gas and petrochemicals industries, with over 500 workers in more than 15 units and offices in more than 10 countries.

It has been involved in a dozen M&A moves since 2006.

Most recently, in 2013, it acquired a majority stake in Atom Instrument, an American manufacturer of elemental analysers, and a 31 per cent stake in SAS Sofraser, a French firm that researches, designs and manufactures viscometers and analysers.

The move has expanded its number of patents to 17, and given it access to new markets.

Dr Wong said smaller firms have to be prudent in making decisions as "the chances of failure are much higher compared with established businesses".

He added that firms have to be aware of the global economy affecting their industries. "Now with the softening oil industry, it presents even greater uncertainties," he said of his company.

Mr David Emery, chairman of M&A advisory firm Reciprocus International, said more local SMEs are doing M&A deals abroad.

An M&A can cost $60,000 to $150,000, he said. "You need lawyers and accountants and sometimes even translators. These are examples of third-party costs."

His firm does market research for clients, finding potential partners in a few countries, before scouting to profile the potential strategic partner.

"When the two companies meet, they sign a non-disclosure agreement before they enter discussions and come to a final agreement," said Mr Emery.

For Mr Teo, a suitable foreign partner should have values aligned with his company's, with similar objectives to achieve.

"Our strengths must also be complementary so no one will get the shorter end of the stick."

The process also requires some trust that things will go smoothly on the other side, he added.

Dr Wong said any potential partners should be able to hold their own in the partnership.

"They must have technologies, unique products, services or capabilities which supplement our portfolio in the oil, gas and petrochemical industries," he said.

Mr Emery estimates that the boom in SME movement started four or five years ago, with more young entrepreneurs entering the scene or taking over their parents' businesses.

"This new generation is more open to trying new things. They are more Internet-savvy, so partnering someone abroad is no longer limited by borders," he said.

He added that a desire to tap a partner's familiarity with the local market and incentives such as the IE Singapore grants motivate firms to explore M&A options.

But Mr Emery had some words of advice for small firms starting out on this pathway.

"The success rate of start-ups is less than 50 per cent. I would say close to a third make it through the first three years, which is the critical time period for survival."

He said there might be difficulties such as trustworthiness of the foreign partners and differing regulations in other jurisdictions.

"Also, it is important to not get distracted from your core market, meaning do not neglect your home country," he added.

But Mr Emery said SMEs should not be discouraged by any falls along the way, and should use their skill sets and slowly build a credible track record.

"If you haven't seen the abyss, you won't have a successful start-up."

fabkoh@sph.com.sg

A version of this article appeared in the print edition of The Straits Times on June 27, 2015, with the headline 'More SMEs acquiring or merging with firms abroad'. Print Edition | Subscribe