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M&As outstrip initial public offers as exit route for tech firms

Observers say many firms' reluctance to go the IPO way stems from lofty valuations, which are beyond what public markets will pay

"Founders no longer need to go public to get a large amount of capital, and they'd rather stay private and not expose all the numbers to the public." - Pocket Sun, founding partner of SoGal Ventures, described as the world's "first female-led millennial" venture capital firm investing in US and Asian startups
Twilio is seen as pricing itself low, to attract investors in the fragile, desolate IPO market.


THE sun's out. The global tech IPO (initial public offering) winter may finally be thawing, given the impending billion-dollar listings that mobile messaging operator LINE and cloud communications provider Twilio announced this month.

But M&As (mergers and acquisitions) - such as Microsoft's recent US$26.2 billion buyout of LinkedIn - appear to have outstripped IPOs to become the prevalent exit strategy for tech firms, and particularly in South-east Asia, observers said.

Benjamin Ong, M&A head at KPMG Singapore, told The Business Times: "Capital markets are not according the kind of high valuations they were previously giving to tech unicorns."

A unicorn is a startup valued at more than US$1 billion.

He attributed the weakness to the "intense scrutiny on results", from which companies are "punished for any failure to meet forecasts".

This, coupled with macro market volatility and what some observers have noted as the relatively poor performance of last year's new tech listings (eg, Box and Square), could explain why LINE and Twilio have chosen to "play conservative" by pricing themselves low: to attract investors in the fragile, desolate IPO market.

LINE, the Japanese subsidiary of South Korean Internet group Naver, earlier this month announced an IPO on the Tokyo and New York stock exchanges, reportedly with a goal of raising US$1-2 billion at a valuation of US$5-6 billion. That is about 40 per cent down from LINE's original one trillion yen (US$9.6 billion or S$12.7 billion) valuation when it first filed for an IPO in 2014.

Twilio, the San Francisco startup that allows software developers to add voice or text communication features to their apps, last week set terms for an IPO on the New York Stock Exchange (NYSE), hoping to raise as much as US$161 million at a US$1.07 billion price tag. That marks a small premium over its most recent private valuation of US$1 billion.

The two companies see good revenue growth. LINE in 2015 posted a turnover of over US$1 billion, a 40 per cent jump from the year before. It is reportedly profitable. Twilio's 2015 revenue grew 88 per cent year on year to US$166.9 million, though net loss deepened by a third from US$26.8 million to US$35.5 million. Twilio has yet to turn a profit.

Financials notwithstanding, both listings will jumpstart a market that has not seen IPO action since software maker Atlassian's in December and payments startup Square's in November. LINE could be headed for the biggest IPO for a tech firm, and Twilio the first IPO for a US Bay Area tech firm, in 2016 - said to be the slowest year in tech IPOs since 2009.

According to Kathleen Smith, founder of IPO services firm Renaissance Capital, the reluctance by many tech firms to go for an IPO stems from their sky-high private valuations, which are usually beyond what public markets will pay. Ms Smith said that an IPO would force firms to discount their valuations, an undesirable task.

Pocket Sun, founding partner of SoGal Ventures - described as the world's "first female-led millennial" venture capital firm investing in US and Asian startups - noted that IPOs still represent a majority of exits in China, but not in South-east Asia and the US, because more money is flooding private capital and fuelling very late-stage rounds.

Ms Sun said: "Founders no longer need to go public to get a large amount of capital, and they'd rather stay private and not expose all the numbers to the public."

She added that M&A activity was becoming more common in Asia, and that China and South-east Asia have been "quite active" in looking for overseas acquisition targets.

Ms Sun said: "Some private equity and venture capital funds have limited partners which are Chinese public corporations looking to buy companies abroad, therefore the funds have a clear path to exit."

KPMG Singapore's Mr Ong added that achieving organic growth in the tech sector may pose a challenge, hence M&As are key to product, customer and talent expansion. "Acquirers today are paying for synergies, and have a deeper understanding of what they are seeking when they make acquisitions."

Microsoft's purchase of LinkedIn demonstrates, among others, a commitment to the business customer and harnessing big data for growth. As another example, American sports apparel firm Under Armour has in the last two years spent nearly US$1 billion acquiring and investing in startups in the health tracking space. Ms Sun said this was to "add tech elements" to the sports brand and improve company culture and diversity.

In South-east Asia, tech investments and M&A activity have remained strong despite the global economic volatility. Ms Sun noted that South-east Asia was not affected much by the "capital winter" and is in fact "going quite aggressively".

Mr Ong credited the region's insulation to its market dynamics and complexities. "There is also much interest from global players for M&A as it allows them to scale into the region more effectively and efficiently than if they were to attempt to go into the market themselves."

Ms Sun added: "I wouldn't say M&A is a preferred exit, but it is happening more and more in the tech space around the globe. I would encourage startups to always understand what possible exits exist for the company."

An IPO is one. The successful IPOs of LINE and Twilio will be welcome relief to the tech industry. Bilal Zuberi, a partner at New York venture capital firm Lux Capital, said: "(It) would definitely encourage more entrepreneurs sitting on companies with good revenue and profitability to consider the IPO market, especially with the slowing down of large private financings (minus a few outliers)."

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