Category: Asia

China’s M&A trade imbalance

Mark Fontecchio
by Brenon Daly

The economic protectionism and national isolationism that has brought the world’s two largest economies in conflict has cost both the US and China billions of dollars. Yet the wounds in the ongoing trade war aren’t evenly distributed. So far in the early days of the conflict, China has suffered more damage since it started with more to lose.

That imbalance – and the accompanying vulnerability – shows up in broader macroeconomic implications for the two countries. As my colleague Josh Levine recently noted, China’s exports to the US account for 3.5% of their GDP, while only a scant 0.6% of the US GDP is generated by exports to China.

The disparity also plays out in M&A activity, which is also a form of ‘trade,’ after all. As 451 Research’s M&A KnowledgeBase shows, the ledger there is rather imbalanced: Since 2002, China-based acquirers have spent three times more on US tech vendors than the other way around. In that period, China has done more shopping in the US than anywhere else, with American tech firms accounting for one of every six deals announced by a Chinese buyer. (For the record, a majority (60%) of tech transactions by Chinese companies involve a target also based in China.)

More notably, Chinese firms have announced billion-dollar purchases of key tech assets from such prominent US vendors as Uber, IBM and Lexmark. In contrast, there hasn’t been any comparable deal flow in reverse. China’s ‘Great Firewall’ has blocked a lot of business expansion – including acquisitions – by US tech companies in the world’s most-populous country.

The contentious relationship between China and the country that had been its largest supplier of tech targets is just the latest complication in the country’s nascent effort to emerge as an M&A powerhouse. Currency restrictions imposed by Beijing diminished their ability to pay for deals, while the recent domestic economic slowdown has made Chinese companies think twice about taking on any acquisitions. And even if the deals do get done, in the current highly politicized environment, there’s no guarantee now that regulators will sign off on it.

For all those reasons and more, China-based tech vendors have stopped shopping. They are currently averaging just one acquisition a month, according to the M&A KnowledgeBase. That’s just one-quarter the rate at which they were purchasing tech providers in the past half-decade. Assuming that pace holds, our numbers show that Chinese buyers will announce the fewest tech transactions in 2019 since 2003.

Trump’s death blow to a deal

Brenon Daly

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

The state of tech M&A in China

Brenon Daly

Contact: Brenon Daly

After six straight years of explosive growth of tech M&A, China’s great shopping spree is winding down. The combination of increasing domestic economic uncertainty and, more crucially, newly imposed currency restrictions has blunted both the drive and the means for buyers from the world’s second-largest economy to do tech deals. Based on spending so far this year, China-based acquirers are on pace in 2017 to hand over just one-quarter the amount they spent on tech acquisitions in 2016, according to 451 Research’s M&A KnowledgeBase.

Of course, last year stands as a record for the value of tech transactions by China-based buyers, with the $40bn worth of announced purchases equaling the total from the two previous years combined. In contrast, the M&A KnowledgeBase totals just $3bn worth of deals by China-based acquirers so far in 2017.

To illustrate just how tight China’s former free spenders have become, consider this: They have yet to announce a single tech transaction in 2017 valued at more than $1bn, after announcing a record 10 such big-ticket deals in 2016. Like acquisitions last year by China-based buyers in non-tech sectors, many Sino shoppers in 2016 went after high-profile targets across the tech sector, including Tencent reaching for videogame maker Supercell, as well as financial firms picking up Ingram Micro and Lexmark.

For a more in-depth look at the recent changes and the outlook for doing deals in China, be sure to join 451 Research’s webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. Tomorrow’s webinar is open to everyone, and you can register here.

Dealing with the dragon

Brenon Daly

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.

 

A half-trillion-dollar year for tech M&A

Brenon Daly

Contact: Brenon Daly

Even after a record tech M&A run in 2015, dealmakers still had ambitious shopping plans for 2016. Across the globe, tech acquirers announced $500bn worth of transactions in the just-completed year, ranking 2016 as the second-highest annual total for spending since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase. The unexpectedly strong spending last year came as the number of deals valued at $1bn or more soared to a new record, thanks in no small part to unconventional buyers ready to write big checks.

Although overall M&A spending dropped just 15% year over year in 2016, the year started much slower. In the opening months, the value of announced transactions was running at only half of 2015’s average monthly level. Only a summer surge pulled last year above a middling performance. In the back half of 2016, companies shrugged off the political shakeups in the European Union and the US and inked big deals. Nearly two-thirds (63%) of last year’s total announced M&A spending came in the final six months of the year, according to the M&A KnowledgeBase.

Even with the decline in the aggregate value of tech transactions in 2016, spending has still increased for three of the past four years. That surge, which has seen the annual amount of money spent on acquisitions more than double over the period, has expanded the pool of tech buyers beyond the ‘usual suspects’ of big-name corporate acquirers. For example, private equity firms announced more transactions in 2016 than any year in history, with spending soaring to its highest level since before the recent recession, when ‘club deals’ were all the rage. Also, Asian-based tech companies accounted for 16 of the 98 transactions valued at $1bn or more, an unprecedented share of the top end of the M&A market for the traditionally conservative shoppers.

As to where that leaves tech M&A for 2017, we’ll have some predictions about that from the main participants in the market later this week. In mid-December, 451 Research surveyed – separately – both corporate development executives and senior investment bankers to get a sense of their plans and pipeline for the coming year. One high-level finding: for the first year in the decade of surveying both groups, the forecasts didn’t exactly line up with one another. Uncharacteristically, bankers sounded a bearish tone for 2017, while corporate executives plan to ramp up their shopping. Look for full reports on the outlook and reasoning from both groups later this week.

 

In Trump, a tech M&A watchdog with more bite

Brenon Daly

Contact: Brenon Daly

Regardless of how you voted – and whether today you’re mischievously grinning and flipping the finger at Washington DC or hastily planning a move to Canada – there are still deals to be done. There might not be as many of them, as has certainly been the case in the run-up to the election, with monthly transaction volume dropping about 10% since last summer. But tech companies are still going to want to consolidate rivals, buy their way into promising adjacent markets and roll the dice on unproven startups as they look to M&A to drive growth.

That said, some of those strategies – particularly those that involve foreign acquirers of US assets – may well get more scrutiny in the new Trump regime than they would have during a Clinton presidency. That would be our contention anyway, based on the protectionist sentiment that Trump espoused during his campaign. In particular, he has singled out China for some of his sharpest criticism. Trump has said he plans to bring a case, both in the US and at the World Trade Organization, against ‘unfair subsidiary behavior’ by the world’s most-populous country. If we look at how that contentious view could impact tech M&A, we can certainly make the case that Chinese buyers probably won’t be shopping as freely in the US in the coming years.

If that is indeed the case, the slowdown would end a dramatic acceleration in deal flow this year. Already in 2016, Chinese buyers have spent more money on US tech vendors than in the previous five years combined, according to 451 Research’s M&A KnowledgeBase. In terms of deal volume, they’ve done almost as many transactions in the first 10 months of 2016 as they did, collectively, over the past two years. This year’s shopping spree has included a number of well-known names, which is also likely to draw the attention of a populist president such as Trump. Chinese buyers have recently picked up Ingram Micro, which swings nearly $50bn worth of tech gear and services each year, 25-year-old printer maker Lexmark and even a majority stake in the gay dating app Grindr.

Regulatory review has always been a consideration in any significant tech deal. We would guess that with Trump’s election, he will probably look to strengthen the Committee on Foreign Investment in the United States (CFIUS). At least in tech transactions, that intra-agency committee hasn’t been as active as it was a decade ago. (Somewhat dramatically, we termed CFIUS an ‘angel of death’ after it blocked the proposed sale of 3Com in 2008 due to the participation of Chinese networking giant Huawei Technologies.) In Trump’s new regime, that watchdog will almost certainly have more bite.

kb-china-acqs-us

Media.net becomes latest Chinese ad-tech target

Scott Denne

Contact: Scott Denne

Inflated stock value on China’s exchanges and a belief in a coming currency devaluation continue to fuel a boom in overseas M&A from the People’s Republic. The latest acquirer to add to that trend is Beijing Miteno Communication Industrial Technology, which announced the purchase of Media.net, a contextual advertising technology firm, for $900m in cash. With more than four months left to go in the year, China-based buyers have crushed their previous record on foreign acquisitions three times over by spending $13.1bn, compared with $3.7bn in all of last year.

We expect such deals to continue, particularly in ad-tech, as vendors in that country widely anticipate an eventual devaluation of their currency. Whether such a devaluation will occur isn’t known, but it’s generally accepted by much of the business community in the country and that has been a factor in the sudden spurt of M&A.

China-based acquirers have been particularly aggressive in their pursuit of ad-tech companies like Media.net. These businesses play well into the arbitrage strategy that’s driving much of China’s overseas acquisitions. The buyer trades at 12.6x trailing revenue on the Shenzhen Stock Exchange – adding Media.net at a 3.5x multiple should boost that nicely. That’s a dynamic we’ve seen in several, though not all, such purchases.

Advertising technology plays well in that arbitrage strategy and those businesses have become popular targets for Chinese shoppers. On a revenue basis, valuations tend to be lower in ad-tech than other tech sectors because gross margins are lower – 15-25% gross margins are quite common. Also, a recent dearth of US acquirers for those assets has driven prices even lower. According to 451 Research’s M&A KnowledgeBase, the median historic multiple on ad-tech transactions is 2.7x TTM revenue. That has dropped to 2.2x in the past 24 months.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Lexmark prints a sale

Scott Denne

Contact: Scott Denne

Lexmark sells to a syndicate of China-based companies for $2.5bn in cash following six years and $2bn invested to transform itself from a printer supplier into an enterprise content management (ECM) software vendor. Despite that spending, its business continued to deteriorate and a series of earnings and guidance disappointments sent it looking for the proverbial ‘strategic alternatives.’

Seine Technology Group leads the acquisition consortium through its subsidiary, Apex Technology – a maker of printer cartridges. Siene also owns Pantum International, a printer and printing services company. Private equity firms PAG Asia Capital and Legend Capital are also participating. Including Lexmark’s debt, the deal values the target at $3.6bn, or 1x trailing revenue – well below the median multiple (1.5x) for hardware providers in the past 24 months, according to 451 Research’s M&A KnowledgeBase. That’s a particularly sorry comparison considering that 15% of Lexmark’s $3.5bn in annual revenue comes from software, where multiples are usually higher.

Lexmark’s printer business has been in steady decline for a few years, dropping 12% last year. Today’s sale aims to reverse that by growing the business in Asia, where Lexmark has little presence at the moment. Lexmark’s software business has grown dramatically via M&A, yet its organic growth doesn’t impress. Enterprise software sales jumped 81% last year to $534m, although most of that was due to a half year of ownership of Kofax ($298m in TTM revenue at the time of its purchase) and its first full year as owner of ReadSoft ($119m in TTM). In the fourth quarter, its software business grew just 5% sequentially. Today’s deal comes as Lexmark is halfway through restructuring those acquisitions, which largely consisted of overlapping products, to improve profits.

Goldman Sachs advised Lexmark on its sale, while Moelis & Company banked the buyers.

Black swans roil tech M&A market

Brenon Daly

Contact: Brenon Daly

During the six-year bull run on Wall Street, corporate treasuries have been as flush with cash as executive offices have been flush with confidence. Put those two factors together and we have the makings of an M&A boom like the one that has put spending on tech acquisitions so far this year already twice as high as it was in the recession years.

Remove either of the crucial components of cash and confidence, however, and deals don’t get done. It’s hard to go shopping when your head is spinning with volatility and your guts are clenched in uncertainty. That hesitancy comes through clearly when we look at the prints for August.

In the first two weeks of the month, it was business as usual. Private equity shops and corporate buyers around the globe announced 172 tech, media and telecom (TMT) transactions with an aggregate value of $21.6bn, according to 451 Research’s M&A KnowledgeBase. In the two weeks that followed, as black swans flew above the equity markets around the world, dealmakers announced just 145 acquisitions worth $4.6bn. As uncertainty erased trillions of dollars of stock market capitalization over the past two weeks, spending on M&A plunged almost 80%.

Heavily skewed to the first half of the month, August spending totaled $26.2bn, which is roughly half the average amount for the previous seven months of 2015. Yet even with the mini-recession in tech M&A since mid-August, spending on 2015 deals overall is still tracking to its highest level since 2000. Through eight months of the year, dealmakers have announced transactions valued at about $375bn, roughly $45bn short of the $420bn recorded in 2007.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Wall Street confidence July 2015

 

 

 

At the Wall Street box office, Alibaba is a blockbuster

Brenon Daly

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.