#Asia Not a buyer or seller market, M&A in Southeast Asia is still at the investor stage


M&As happen on a seven-year timeline, so Southeast Asia should see more deals in the coming years

Two recent acquisitions in the region — the purchase of RevAsia by Media Prima and the SPH selloff of 701search — ended what had been a long draught for significant M&As in Southeast Asia.

With Chinese giants like Alibaba, Tencent and JD.com turning their attention south, investors, entrepreneurs and startups are asking, are we in a buyer’s or seller’s market?

Well, the answer is neither, said both Hanno Stegmann of Rocket Internet and Grace Yun Xia of Tencent, in a fireside chat at today’s Tech in Asia conference.

Also Read: Pangyo Techno Valley going global as Korea holds K-Startup Grand Challenge 2017

Stegmann, who is the Asia CEO at Rocket, explained that a typical acquisition does not approach reality until the company nears profitability. This means that the Southeast Asia ecosystem simply needs patience.

“What we see and would normally say is it takes seven-ish years to take a company from concept to profitability. Buyers look for companies that are very close to break-even. So you have to give companies time,” he said.

Moderator Vinnie Lauria, a Managing Partner at Golden Gate Ventures, pointed out that we read about ‘big events’ and our minds think they take one or two years. The reality is the process started about seven years ago.

Position your company for the ‘why’

Xia, the Senior Director for Corporate Strategy and Investment at Tencent, agreed and laid out the key reasons why companies buy startups. She said Southeast Asia has not yet matured in two of the three factors and the third could happen anywhere in the world.

The factors are as follows:

Companies acquires startups as a means to enter a new market: This requires the company to have a large user base. Xia said there are not a lot of companies in Southeast Asia that fit this model.

A good example of this phenomenon was the acquisition of BIG CAT Entertainment by Asia Innovation Group last year. BIG CAT, from Vietnam, had a huge presence on Youtube, which made it a perfect target for Asia Innovation Group, from China.

The industry is experiencing consolidation: The second reason for M&A is a case study that proves Stegmann’s point. E-commerce is starting to see the 7-year timeline on the horizon and it is no coincidence that many of the deals (both large and small)  are in the industry.

Acquire an IP or top talent: This can happen anywhere. Sure, places like Silicon Valley, Singapore and Beijing attract talent but amazing companies come out of anywhere (e.g. Piktochart is based in Penang, Malaysia).

Google’s first Southeast Asia acquisition was the work chat-app Pie which was in large part an acquihire to kickstart the company’s Southeast Asian engineering team.

Because of the factors listed above, Xia said it is crucial for startups to understand the ‘why’ of a potential sale.

Did the CEO do a good job and build a superstar team of engineers? Maybe pitch an acquihire.

Does the company genuinely think they have a unique product? Pitch that IP, baby.

Or, are they doing something that is popular elsewhere but not in Asia? That startup may work hard to be the ‘best in the region’ when the foreign company wants to enter the Asian market.

How to handle a soft landing

The unfortunate reality of startup life is there may be a point when it becomes impossible to raise more cash. When companies find themselves in this position and look to sell their company, it is called a ‘soft landing’.

It is usually viewed negatively, but it is better than completely going out of business and there are ways to handle this situation that can work.

“Have a sustainable business model so the timing will work for you. If you have to sell because are running out of cash, you don’t have any negotiation power,” said Xia.

Also Read: Netflix and Youtube are the dominant video streaming apps in Asia, so how can local challengers compete?

The point is, the worst time to sell is if the entrepreneur suddenly realises they have a six-month-long run-rate. That desperation seeps out of the business person, making it hard to sell.

If the Founder struggling to raise funds, but has two years of financing, they have time to search for suitable partners (or at least make the necessary adjustments to stand out in the industry).

The final interesting note shared by both Xia and Stegmann is that startups should look towards telcos as potential acquisition partners. The industry is aggressively working towards digitalisation, which presents an opportunity for startups to sell their product as a means for them to compete with other telcos.

Copyright: andrewgenn / 123RF Stock Photo

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