Asia Pacific (APAC) M&A activity is skewed towards East Asia and North Asia with enterprises based in China, Japan and South Korea emerging as “net acquirers” of startups, with a 7x increase in deal value and 20 per cent increase in volume from July 2016 to June 2017.
According to a joint report by international law firm Orrick, innovation advisory Mind the Bridge and startup database Crunchbase, the “Startup M&A Report 2017”, startup exits since 2010 amounted to an aggregate value of $1.3 trillion. The study tracked over 15,500 startups worldwide.
Global M&A registered the highest year-over-year increase of 42 per cent in deal volume from July 2016 to June 2017, during which more than 4,210 exits occurred. In general, the US has a good equilibrium between the numbers of exits and acquisitions whereas Europe still records a negative M&A balance. The US and Silicon Valley continue to dominate global startup M&A, followed by Europe.
APAC M&A overview
South Korea’s Samsung leads startup acquisitions in the country across a number of domains. Meanwhile, in Japan, the major acquirers are advertising agency network Dentsu and Rakuten, with its startup ecosystem still at a developing stage. Hiroki Sugita, Partner of Orrick’s Tokyo office, explains that there are more attractive startups in the US and Europe with a broader base.
Sugita explains: “Facing the aging population and shrinking domestic market, Japanese corporates are keen to invest in companies targeting markets outside of Japan while many Japanese startups still eye the domestic market.”
Ted Johnson, also a Partner of Orrick’s Tokyo office, adds, “Domestic venture capital funds in Japan naturally continue to invest in local startups but Japanese corporates – for acquisition and investment purposes – tend to be more focused on startups in traditional innovation centers, such as Silicon Valley, rather than those in their own backyard. This may shift as the startup ecosystem continues to develop in Japan.”
In the Asia-Pacific (APAC) region, the findings reveal that APAC startups contributed 12 per cent and 8 per cent respectively to the global exit volume and exit value during the 12 months period ended June 2017.
In terms of the exit/acquisition ratio, specifically China, Japan and South Korea, are “net acquirers” of startups due to a lack of supply in startups despite the strong appetite from numerous corporate buyers in the region.
According to Orrick, the money is “likely flowing not only to startups in the region but also large amounts to startups outside the region”, with a $66 billion gap to account for in the APAC ecosystem.
China M&A highlights
Jeffrey Sun, Partner of Orrick’s Shanghai office, said, “China is interested in acquiring technologies offshore. European or U.S. startups are attractive to Chinese companies due to their valuation and promising investment returns. European and U.S. markets are also considered to be preferable for exits.”
This is exemplified in major Chinese firms seeking to list on the NASDAQ, or even on the Australian Securities Exchange (ASX) despite the rise of the Hong Kong bourse as a listing destination for Chinese enterprises, coupled with significant depth and liquidity on other Chinese stock exchanges in Shenzhen and Shanghai.
Sun tells this portal in an email exchange: “A major element is listing standards. Mainland China (Beijing/Shanghai) has stringent listing requirements as evidenced by China Securities Regulatory Commission (CSRC)’s recent rejection of several applications. In this sense, the actual listing standards in Shenzhen and Shanghai are not only stringent but, more importantly, unpredictable (needless to say China once suspended IPOs for a long period of time).”
“Hong Kong’s IPO timetable is more predictable; but on the other hand, there are specific requirements for a track record of profitability (just like mainland China), unless certain market capitalization is reached. Given the high volatility of tech companies’ valuation, sometimes issuers are uncomfortable to rely on the market cap for the listing requirements.”
“In comparison, Nasdaq and NYSE are flexible in admitting tech companies which don’t necessarily have any track record of profits (or even revenues),” he adds.
Other elements at play that impact the interaction between Chinese startup ventures and China’s equity capital market are the need for secondary financing, dual-class share structures and the Chinese investor base.
Sun notes: “Given the continuous financing needs of tech companies in general, the efficiency of conducting follow-on offerings is another key element for selecting listing venues. Shenzhen and Shanghai are both considered to be less efficient in this regard. Hong Kong is comparatively better but still lags behind Nasdaq or NYSE (both of which may allow overnight pricing for a secondary offering).”
Beijing’s influence on M&A
Another recent development was an announcement in October that Chinese Intenet regulators are seeking to acquire small stakes in Internet majors Tencent Holdings, Chinese content creator Weibo Corp and Alibaba‘s video content firm Youku Tudou.
Asked how this could impact M&A in China given the additional political element such a move brings, particularly in international transactions, Sun argues that the impact will be limited.
He told DEALSTREETASIA: “Chinese investors’ outbound investments have already been subject to excessive scrutiny. Due to various exaggeration of Chinese threats, CFIUS and similar regulation systems elsewhere have already subjected Chinese investors (including private investors) to undue burden when they invest in any sensitive (and in many cases, even insensitive) sectors.”
“For example, a group of Chinese investors, including Tencent, called off plans to buy a stake in HERE Technologies (digital map provider) after US authorities withheld approval. This was even just a minority stake deal.”
He observes: “Most major Chinese tech companies are in fact listed overseas. Tencent (as an exception) is listed in Hong Kong, whereas Alibaba, Baidu, JD.com and Sina, etc. are all listed in the US. If the Chinese government wants to acquire a stake in such companies, they need to invest in overseas holding companies incorporated primarily in the Cayman Islands, and comply with the SEC and stock exchange requirements on disclosure and other procedures.”
“It doesn’t seem to be any legitimate way for them to acquire a controlling stake in these tech companies. On the other hand, any entity can buy a stake in these companies (in US dollars or other freely convertible currencies). Therefore, the concern over these major Chinese tech companies being controlled by the Chinese government is unduly placed; anyway, there has been enough scrutiny over these tech companies’ acquisitions already.”
Sun takes the position that at this juncture is the “right time to re-think the concern over China’s growing economic power”, with some concerns justified, given the dominant influence of the PRC government on the Chinese economy. However, he states that these concerns are overblown, with unnecessary blame often assigned to China.
He offers: “A meaningful way is to show fairness to Chinese institutions not controlled by the PRC government, and to facilitate their reasonable international expansion efforts. The international expansion of these companies will be beneficial to everyone, including those outside China, and will enhance mutual understanding between China and the rest of the world.”