M&A set to rise in Southeast Asia

M&As as the main exit strategy for technology start-ups in Southeast Asia are expected to spike in the coming years. Mirroring exit hubs such as London corporate finance and Silicon Valley, companies in the region are becoming more finance-savvy.

They are set to take this route as opposed to 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 the region, as compared with 127 acquisitions.

The biggest drawback may be that the tech market itself is immature. Only 7% of the 170 companies listed on Catalist are in the information technology sector.

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. 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.

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 $200 million in 2012, while customer support chat software company Zopim was acquired by San Francisco-based customer support firm Zendesk for $30 million in 2014.

Lawyers and analysts agreed that the M&A route is a more well travelled one, and put it down to the “onerous” listing process, among other reasons.

M&As provide more flexibility for financing sources and less onerous requirements… whereas the various stock exchanges in Southeast 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.

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.

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