South-east Asian tech M&A may grow, but IPOs a wild card

Singapore

TECH mergers and acquisitions (M&As) in South-east Asia could pick up in 2021, driven by Chinese firms' growth appetite, as well as the pressure investors face to realise returns, industry players told The Business Times.

Among the anticipated deals, all eyes are on how the reported merger effort plays out between Grab and Gojek, which are said to be valued at US$14 billion and US$10 billion respectively.

Unlike the bullishness on M&A activity, the outlook for initial public offerings (IPOs) among South-east Asian tech firms is still hazy, observers reckon.

But the IPO tide could rise if a merged Grab-Gojek entity pursues a listing as soon as 2021. Industry players are also keenly watching if Indonesia's Tokopedia and Traveloka may go public next year, and if they do so via Spacs (special purpose acquisition companies).

M&A activity among South-east Asia's tech firms has been tepid this year, given Covid-19 restrictions.

"2020 has without question been a difficult year. Lockdowns and movement controls globally have certainly hampered investor marketing and due diligence efforts," said Hwee Ang, founder and principal consultant of Anagram Advisors, which works with venture capital (VC) and private equity firms.

While the aggregate value of startup M&As is not publicly available, many deals this year were of a relatively small scale. Some involved distressed firms, such as Tencent's purchase of cash-strapped streaming service iflix. One rare instance of cheer was the sale of Singapore-based TradeGecko to US tech giant Intuit for reportedly over US$80 million (see table).

Heading into 2021, M&A could pick up as Chinese firms are hungry for growth in South-east Asia, said Kuan Hsu, general partner at early-stage investor KK Fund. Large deals in the region have typically involved Chinese tech giants, such as Alibaba pouring US$4 billion into Lazada.

"I believe that starting in 2021, there could be a resurgence of heightened M&A interest by Chinese companies in South-east Asia. If not for Covid-19, probably we would have seen such interest this year," Mr Hsu said.

"In addition, Tencent, ByteDance (and) Bigo all setting up a significant presence in Singapore may be positive signs that the Chinese companies are once again focused on South-east Asia."

Lim Kuo-Yi, managing partner of Monk's Hill Ventures, is similarly bullish on M&A activity from Asian strategic players, including those from China.

"With (South-east Asian) tech companies largely seeing growth from the acceleration of digital adoption during the pandemic, they are poised to be attractive targets for other strategic investors to acquire," he said.

Another factor that could drive M&A is pressure from early investors. Many South-east Asian VCs are reaching the tail end of their 10-year funds, and may look to exit their stakes in 2021.

Ms Ang said: "I anticipate more small exits ahead, primarily through secondary transactions (that are) driven particularly by a crop of venture funds approaching the end of their fund life, and hence facing pressure to return capital to investors."

However, Ms Ang's expectations on the timing of exits are also tempered. "I think the first half of the year should remain relatively muted, but activity may pick up in the second half of the year as conditions revert towards relative normalcy," she said.

While there is optimism on the M&A front, a big question mark still hangs over whether South-east Asia's most valuable tech firms will go public in 2021 - or if it will be a dry year.

One development being watched closely is if a Grab-Gojek merger may culminate in a public listing, said Mr Hsu of KK Fund. "If the merger goes through and the combined entity is able to launch an IPO, that will be a huge bellwether for the South-east Asian tech ecosystem," he said.

Besides Grab and Gojek, there has been some IPO buzz among the region's other "unicorns" - or firms valued over US$1 billion.

Singapore-based JustCo, valued at US$1 billion, told BT in December that it plans to go public, but did not reveal a timeline.

In the same month, Indonesia's Tokopedia and Traveloka both revealed that they are evaluating IPO plans. SoftBank-backed Tokopedia confirmed reports that it was approached by a Spac backed by billionaires Peter Thiel and Richard Li. The potential deal is reportedly worth US$10 billion.

Unlike a traditional IPO, a Spac deal involves merging the target startup with a publicly-listed shell company that has pooled capital from investors. Spacs have been all the hype this year, with US$56 billion sunk into global Spac listings between January and October, according to Refinitiv data.

But whether Spacs will acquire South-east Asian startups in the coming year remains to be seen. Mr Lim of Monk's Hill believes that while Spacs may not focus as much on emerging markets, there is some possibility.

"We will likely see interest in some of the well-known assets in South-east Asia, given the appetite for growth and tech companies. Spacs with emerging market assets will also be compelling to investors looking for diversification," he said.

Besides the unicorn crowd, some mid to small-scale tech startups may also pursue IPOs in the coming year. For instance, Singapore-based Prestige Biopharma told BT that it expects to complete its IPO in Korea next year. The firm was most recently valued at over US$800 million, according to VentureCap Insights.

Other startups may also vie for the Singapore Exchange's junior Catalist board, encouraged by the successful mainboard listing of Nanofilm this year, reckons Ms Ang. But she does not expect this to be a sizable driver of deal value.

Many South-east Asian startups have thus far emphasised that they are not in a rush to go public. But could the recent success of big-name tech IPOs in the US, such as Airbnb and DoorDash, spur players here to seize the momentum?

Sam Lee, chief executive of financial services firm Paloe, believes this may not necessarily be the case, given the intrinsic differences between the US and South-east Asian markets.

"The South-east Asian market, rather than an IPO play, is more of a new market acquisition play... Of course, you see some bigger boys who are potential candidates for listings. But I see more trade sales rather than IPOs," said Mr Lee, who works closely with startups.

Still, things could change, as regional stock exchanges go on a charm offensive to attract tech listings.

Mr Hsu cites the efforts of the Indonesia Stock Exchange to improve listing criteria for these firms. "I hope that we will see more progress to encourage tech startup listings in South-east Asia," he said.

Whether the region's tech listings can attract global investors remains to be seen. Arjun Sethi, partner at US-based Tribe Capital, is optimistic about South-east Asia's potential.

"South-east Asia as a whole has had to leapfrog and adapt into a new environment over the last five to ten years... Businesses are being created on mobile - such as logistics, payments and lending. That's happening at a rapid rate," he said.