M&A activity among tech firms in region set to rise

Video site Viki (above) was bought by Japanese e-commerce site Rakuten for US$200 million (S$276 million) in 2012. The report pointed out that the "most notable" exits for Singapore tech companies have all been acquisitions.
Video site Viki (above) was bought by Japanese e-commerce site Rakuten for US$200 million (S$276 million) in 2012. The report pointed out that the "most notable" exits for Singapore tech companies have all been acquisitions.PHOTO: VIKI

Mergers and acquisitions preferred route for such start-ups compared to IPOs, says report

Mergers and acquisitions - as the main exit strategy for technology start-ups in South-east Asia - are expected to spike in the coming years.

They are set to take this route as opposed to initial public offerings (IPOs), a report by Singapore-based venture capital firm Golden Gate Ventures has found.

Using data from the past decade of M&As and IPOs, it projected that from 2020, there will be at least 250 M&A deals per year, versus only three IPOs yearly, in the tech start-up sector.

From 2005 to last year, there were just 11 tech IPOs in South-east Asia, as compared with 127 acquisitions.

"The biggest drawback may be that the tech market itself is immature. Only 7 per cent of the 170 companies listed on Catalist are in the information technology sector," said the report, referring to the Singapore Exchange's junior board.

"Institutional investors that are looking for growth investments on the exchange don't have experience dealing with technology start-ups and may have difficulty understanding their business models and growth trajectories," added the report, which was released this week.

However, more institutional money is leading to better funded and more capable technology companies, making them increasingly attractive to prospective buyers.

A more active Asean market with the creation of the Asean Economic Community is also drawing investors, noted the report.

"The region has already passed an inflection point in terms of digital growth; more people are consuming digital content, more people are paying for goods and shopping online, and more people are buying mobile phones."

The report further pointed out that the "most notable" exits for Singapore tech companies have all been acquisitions.

For instance, video site Viki was bought by Japanese e-commerce site Rakuten for US$200 million (S$276 million) in 2012, while customer support chat software company Zopim was acquired by San Francisco-based customer support firm Zendesk for US$30 million in 2014.

Lawyers and analysts agreed that the mergers and acquisitions route is a more well travelled one, and put it down to the "onerous" listing process, among other reasons.

Mr Greg Unsworth, digital business leader at PwC Singapore, said: "Mergers and acquisitions provide more flexibility for financing sources and less onerous requirements... whereas the various stock exchanges in South-east Asia are generally not seen to be 'kind' towards the valuation of technology companies.

"It is also quite an onerous process to IPO and this also then subjects the company to extensive scrutiny and ongoing reporting and compliance obligations. Much of this is avoided through the private M&A route."

Principal associate at Olswang Asia LLP, Ms Lee Mun Yi, pointed out that IPOs are generally more attractive to "consumer-facing" companies, such as Facebook.

"A start-up with a business-to- business model would find it difficult to get traction and the publicity needed to do a public offering, as often consumers are not aware of or familiar with the start-up or its product, which would make it difficult to generate sufficient attention to raise funds for an IPO."

A version of this article appeared in the print edition of The Straits Times on March 05, 2016, with the headline 'M&A activity among tech firms in region set to rise'. Print Edition | Subscribe