Optimism drives deal making at record pace
Domestic merger and acquisition (M&A) activity amounted to a total value of US$197 billion in the first six months of 2021. This represents a 20% increase on the average size of the transaction value in the past five years prior to the pandemic, according to a recent Ernst & Young survey. Strong economic recovery and continued growth of household incomes maintained financial buyers’ confidence in their deals in China. While corporate buyers are working to address their financial constraints in the post-pandemic era, optimistic financial buyers have moved on quickly to trigger the transactions that were delayed or cancelled in 2020. As a result, 54% of the deals in the first half of 2021 are private equity (PE)-sponsored.
Asset prices in China and expected valuation by target companies across all sectors have remained at a record high. Value for money will be an important consideration for buyers. At the same time, it is likely Chinese outbound deals will decline for the sixth consecutive year in 2021, due to the strained US-China relationship, travel restrictions and China keeping its foreign exchange reserve within its reach.
Inward-looking strategies re-shared the market
As the US and China continue to challenge each other’s position on trade and sensitive technology issues, inward-looking Chinese government policies aimed at reducing China’s reliance on foreign capital and technologies have directed many state-owned companies to make direct investment in strategic sectors as well as domestic PE funds, which are looking for extra sources of funding to compete with foreign capital-backed PE funds for the “star deals” in the market.
This offers opportunities for many state-owned companies (which often profit from scale rather than healthy EBITDA) to get involved in high-growth and innovation-driven sectors. At the same time, a market with increased domestic capital is expected to deliver a new ecosystem for M&A deals to be “funded by China and for China”.
This is an interesting development in the context of China’s recent overtaking of the US to become the world’s largest destination for foreign direct investment. It remains to be seen whether China with this approach can find a balance between its new inward-looking economic policy and its promise to share the fruits of its economic prosperity with foreign capital.
Sector and size matter
The industrial materials and real property sectors used to record the largest volume of M&A deals. However, the new elites that are driving deal making are artificial intelligence, IT and data, and intelligent manufacturing, as well as “old school” sectors that have been reinvented by digital technologies such as fintech and e-health.
At the same time, however, China’s regulators have looked to put an end to their “experiment first, regulate later’” approach that helped drive the unprecedented growth of China’s technology sector. China’s recent sanctions on its ride-hailing unicorn Didi Chuxing and its retroactive antitrust reviews of Tencent’s M&A deals are a clear signal of this new approach. Regulators in China have decided to join their counterparts in the European Union and US to keep a close eye on the big techs. This requires careful thought on existing strategies and more forward thinking on the impact of policy changes to commercial M&A deals.
Indian start-ups are coming of age
So far, 2021 has been a record year for Indian start-ups. The Indian start-up ecosystem has churned out 14 unicorns during the first half of 2021 alone. The majority of the start-ups that received funding during this year are in the e-commerce, financial services, technology and education sectors. These sectors have either gained or been insulated from the impact of the Covid-19 pandemic.
While the number of these start-up deals may not have increased significantly, the deal and investment sizes have increased considerably. Even though India struggled with the ramifications of the second wave of the Covid-19 pandemic, there has been an increase in the average deal size of a seed round investment to above $1 million in the first half of 2021, up from around $800,000 during the same period last year and $740,000 in 2019. Even an average Series A investment size this year is now around $7.6 million, up from $4.3 million last year and $5.92 million in 2019. The increase in the deal size is a clear indication that start-ups are receiving better valuations than in previous years. This trend is being witnessed regardless of the stage in which the investment is being taken in the start-up’s lifecycle. Deals are taking place in shorter time frames then before due to aggressive negotiations between founders/companies and investors.
Listed space: initial public offerings
This year, there has also been a surge in the number of initial public offerings (IPOs) being made by companies across various sectors. In the first half of 2021, there were over 50 companies filing offer documents with the securities market regulator in India, the Securities and Exchange Board of India, out of which 25 of which have already completed the IPO process (as compared to 15 IPOs in 2020 and 16 IPOs in 2019). The companies which have gone public this year are in varied sectors including three speciality chemicals companies), two agrochemicals companies, two industrial machinery companies and one each from banking, housing finance, construction, and iron and steel. There has not been a large concentration in any one specific sector with the activity largely sector agnostic.
This year, the Indian food delivery start-up Zomato made history by becoming the first Indian unicorn to list on the stock exchanges. The latter half of 2021 is also expected to see other start-ups including the digital payments company Paytm and insurance e-commerce company Policybazaar enter this space and issue shares to the public.
In addition to private sector companies that have listed or intend to list this year, the government is proposing to divest its stake in the state-owned Life Insurance Corporation, the largest insurance company in India, which is being touted as the largest IPO in the nation's corporate history.
The rise in the number of IPOs is indicative of exits given to investors and therefore IPOs can be explored as viable exit opportunities for investors in addition to other exit routes.
The impact of proposed amendments to the Consumer Protection (E-Commerce) Rules 2020
India's government has announced proposed amendments to the Consumer Protection (E-Commerce) Rules, including amending its definition of "e-commerce entity". The proposed amendment has substantially widened this definition and would now capture entities that are:
- merely “related parties” of an e-commerce entity;
- providing support services to e-commerce entities including payment aggregators as well as entities providing logistic services, etc., and
- rely on or provide tech-based services such as food aggregators, transport aggregators, logistics companies, ed-tech platforms etc.
In the event that the definition of "e-commerce activities" remains unchanged in the final amendment, then these entities would become subject to the provisions of the rules and would be required to comply with all of the obligations of an e-commerce entity. This includes registration with the government, the mandatory appointment of local employees as chief compliance officers, nodal contact persons, and resident grievance officers, as well as assuming the liabilities of e-commerce entities under the rules.
While representations have been made by entities that would now fall within the revised definition of "e-commerce" entities, in the event that the proposals are found in the final set of amendments, this would substantially disrupt the existing business and operations of these entities and force changes in their business models to ensure compliance with the rules. In such a situation, it is likely that there will a round of restructuring of the larger affected players with a corresponding adverse effect on the valuations of companies that cannot successfully manage such separation.
South East Asia
Tech start-ups go public
2021 is the year many Southeast Asian tech start-ups have finally gone public. While gaming company Razer and internet giant Sea both went public in 2017, things have been quiet since then.
Indonesian e-commerce company Bukalapak will be the first of this batch to test the appetite of public investors with its listing on the Indonesian Stock Exchange this month, raising as much as US$1.5 billion. Reports that the company is seeking a valuation of US$5.6 billion would imply a price to 2020 sales valuation of almost 60 times – much higher than its peers.
Grab, a ride-hailing to deliveries and financial services super app, is in the process of listing via a SPAC in the United States. The deal values Grab's equity at US$40 billion, the largest SPAC merger announced so far.
Other Southeast Asian tech companies that have announced plans to go public include PropertyGuru, the online property portal, Traveloka, an online travel company, and GoTo, the Indonesia-focused technology company that was the result of a merger between the two start-up giants, Gojek, a ride-hailing and deliveries company, and Tokopedia, one of the country's top e-commerce platforms.
Flush with investor cash, these companies will make both organic and inorganic investments in the region, leading to further deal activity and seeding the next round of start-ups and founders. Some of these deals may even be paid for with newly issued public shares, which can be a valuable acquisition currency.
Another emerging trend is the potential for increased corporate venture investments. For example, the Singapore-based internet company Sea Group recently announced the creation of a new fund, Sea Capital, a platform that would manage its investment efforts and deploy an initial US$1 billion over the next few years.
GLC restructuring in Singapore
In Singapore, many of government-linked companies (GLCs) have investment fund Temasek Holdings as a shareholder. Many of these GLCs are in the process of restructuring their operations to unlock value after years of sluggish share price performance. This could include changing business models or divestment of non-core assets.
For example, telecommunications giant SingTel recently announced a reorganisation that would include selling off its infrastructure assets, while property developer CapitaLand is focused on transforming its listed-entity into an asset-light real estate investment manager.
Much of this restructuring also incorporates the latest environmental, social and governance trends. For example, Keppel, which builds oil and gas rigs, has announced that it is refocusing its activities on renewables.
Increased activity in digital assets
There has been heightened investor attention on entities created to develop or create digital assets such as tokens. This is unsurprising given the fortunes made in the sector, and Singapore's reputation as a jurisdiction where regulators are open to these innovations. Investors nevertheless must pay attention to the classification of these tokens under Singapore law.