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22 7月 2024 Insight Australia
Podcasts

Tech is booming and the deal landscape is rapidly evolving. What are the key tech M&A trends that investors, corporates and advisers should zero in on?

In this podcast, Partners Malika Chandrasegaran and Mia Harrison-Kelf explore the who, the what and the why of technology transactions across the Asia Pacific region. Every episode, Malika and Mia are joined by special guests to discuss a range of different issues involved in tech deals including data, privacy, cyber security, venture capital, the changing regulatory landscape, and more.

 

Latest episode

Episode 6: Navigating the Fintech M&A Landscape

Explore the latest trends and insights in technology deals across the APAC region with our sixth episode focusing on the dynamic world of Fintech. Join Malika Chandrasegaran, along with Charlotte Henry and Michelle Virgiany, experts in financial services and tech regulatory matters, as they delve into the current landscape of Fintech M&A, discussing the shifts in activity over the past year due to post-COVID adjustments and regulatory changes. Charlotte and Michelle provide valuable perspectives on the trends seen in Australia and Southeast Asia, highlighting the driving forces behind Fintech M&A. We explore the key sectors and areas attracting investment, including payment functionality, digital lending, wealthtech, and core banking platforms. Charlotte and Michelle share insights into the evolving focus within these sectors, particularly in Southeast Asia where B2B payment gateways and innovative credit-related businesses are gaining traction. Additionally, we discuss alternate strategies and trends driving Fintech across APAC, such as Banking as a Service (BaaS), big tech's role, and innovative partnerships shaping the industry. Charlotte and Michelle share their excitement about the latest tech innovations, from AI advancements to the potential of mind-controlled typing technology.

  • The rebound in M&A activities in 2024 reflects a renewed sense of confidence and strategic intent among investors and market players. This resurgence is particularly noticeable in sectors such as payments, digital wallets, and supply chain finance, indicating shifting priorities and emerging opportunities.
  • Regulatory changes in Southeast Asia have had a significant impact on M&A activities. Notable examples include high-profile acquisitions like TikTok's acquisition of a stake in Tokopedia. These acquisitions are often strategic responses to regulatory shifts, indicating how regulatory frameworks can influence market consolidation and strategic partnerships.
  • In Australia, ongoing regulatory reforms are shaping M&A strategies. Reforms in areas such as payment sector alignment with PSDII standards, digital assets regulation, and BNPL regulations are driving strategic moves and reshaping the competitive landscape.
  • Payment functionality is a major focus for investment. This encompasses aspects such as faster payments, digital wallets, and innovations in payment initiation through Open Banking protocols. These sectors are seeing significant investment interest due to their potential for growth and innovation.
  • Despite some consolidation, the lending sector remains attractive for investment. This includes various models such as peer-to-peer lending and buy-now-pay-later services. Investors are looking for opportunities to tap into evolving consumer finance trends and technological advancements in lending.
  • Wealthtech, particularly AI-driven solutions for wealth management and customer-centric financial offerings, is gaining traction. Innovations in artificial intelligence are enabling personalised financial services and improved customer experiences.
  • Tech companies providing core banking platforms are becoming key players in the investment landscape. These platforms offer scalability, flexibility, and advanced features that traditional banking systems may lack, making them attractive targets for investment and strategic partnerships.
  • BaaS partnerships are emerging as an alternate strategy for financial services firms. These partnerships allow firms to offer banking products and services through tech platforms, expanding their reach and product offerings.
  • Banks and financial institutions are pursuing digitalisation strategies through consumer-centric apps. These apps offer features such as cashback rewards, personalised offers, and enhanced money management tools, catering to evolving customer preferences and expectations.
  • Big tech entities like Google Pay and Samsung Pay are playing an increasingly significant role in fintech. Proposed regulatory reforms aim to classify these entities as payment firms, reflecting their growing influence and market presence.

Episode 5: Recent trends in venture capital deals

An insight into recent venture capital deals:

Dive into the market’s current soft valuations and whether they are holding true or not with host Malika Chandrasegaran, Partner from our Singapore corporate M&A team and special guests Claire Thompson, Co-Head of VC (Australia) and Victor Chiew, Director at our associated Singapore law firm Prolegis. Hear their thoughts on the changing ‘Market Standard’ for terms amongst transactions and how to best adapt, the expansion of the VC ecosystem with crossover investors attaining a substantial interest in the market and find out what the market looks like for IPOs and if it’s a good time to make acquisitions.

  • Valuations have softened since 2021 but are starting to normalise again. Although valuations are down a little, everyone is willing to have discussions about what a down round might mean and how investors and founders alike may navigate those issues. Investors are taking a closer look at how models are constructed and whether valuations hold true or not.
  • In parallel, we are seeing a much wider variety of terms among transactions. Some terms and preferences that have been considered the ‘market standard’ are being challenged more frequently across South East Asia and Australia.
  • There is more creative structuring being employed and self-tiered or tranche funding is increasing in popularity. This involves funding being received as milestones are reached and requires founders to prove themselves by hitting those milestones in order to receive some of the funding.
  • The VC ecosystem has expanded from that of the traditional VC fund to crossover investors who are shaking up the status quo. In Australia, there has been an increase from big corporates in minority investing. There has been even greater diversity of crossover investors in Asia including substantial interest from sovereign wealth funds, pension funds and family offices.  These crossover investors drive different outcomes as the value and motivation may be strategic partnership or a broader alignment rather than just financial return, and founders have shown they are willing to consider new terms brought by these crossover investors.
  • The venture model of transacting used to be fairly confined to tech or tech related companies but is now being exported into non-tech sectors including conventional manufacturing and FMCG across Asia, and consumer businesses in Australia. It will be interesting to see whether there are other start-up businesses that want to use this funding model to bring on minority investors.
  • IPOs as an exit strategy remain muted, and more companies are open to acquisitions as an exit strategy. In the Australian market, it is a great time to make acquisitions if you are in a position to do to. Many technology clients are looking to pick up businesses to broaden out their customer base or add a complementary offering to size up the business in preparation for an IPO or an exit strategy in a couple of years’ time. There are also some clients buddying up in search of synergies in the constrained funding environment.
  • As part of increased M&A activity as an exit strategy, scrip deals are increasingly popular as businesses are looking to preserve their cash. Scrip deals are effective in ensuring that interests are aligned in driving the business towards future growth, but are more complicated from a documentation perspective. It is not a quick and easy transaction, but if executed well, it can be a great outcome.

Episode 4: Top tax issues in tech deals

Join Partners Malika Chandrasegaran and Mia Harrison Kelf from our Sydney Corporate M&A team for a discussion with Toby Eggleston, Partner and tax expert from our Melbourne office, on navigating tax related issues that arise when negotiating tech deals. They cover what regulators, such as FIRB and the ATO, are thinking about at the moment, issues such as scrip for scrip rollover, earnouts, retention payments and option schemes, and ways that we are bridging value gaps on tech deals in current markets.

  • The ATO is increasingly getting involved in FIRB approval processes and how parties are structuring acquisitions and consideration paid, in particular looking at thin capitalisation, transfer pricing and moving intangible assets offshore.
  • Movement of intangible assets, such as IP, offshore to lower tax jurisdictions should have a commercial rationale and be done at an arm’s length price. New rules regarding deductions for royalties could potentially lead to double taxation so careful thought should be given to these arrangements.
  • Scrip for scrip rollover relief can be valuable as it allows sellers who receive shares (rather than cash) as consideration for a sale to defer the taxing point to when they sell those shares down the line. However, there are various requirements that have to be complied with, including a requirement that the offer to selling shareholders be on substantially the same terms. This can create more complex consideration structures for tech companies where early stage investors are looking for a cash exit but other shareholders (such as management) want scrip and the ATO is increasing its focus on these arrangements.
  • Earn outs can be a useful mechanism to bridge value gaps for tech companies and tech assets, particularly in a fluctuating market. Taxation of earn-outs can be relatively complex and have historically been taxed at market value, which led to interesting dynamics in the way the seller positioned the value of the business and the earn out. More recent changes mean that, if certain requirements are met, earn outs are taxed as if they were part of the original sale consideration and sellers amend their historical tax returns to reflect the additional earn out payment.
  • Where earn outs are tied in part to ongoing employment, they can be taxed as employment income, rather than capital gain from the sale of the business. This can be relevant as Australia’s tax regime provides for a 50% discount (for tax purposes) on capital gains for assets held over 12 months so it is important to consider the relevant structure and implications of specific earn out conditions.
  • Start-up companies often rely on employee share options as part of incentive packages and there are favourable tax concessions that can apply for these employees. There are some technical ATO requirements that have to be complied with to maintain the benefit of these concessions in a sale process, which are not difficult but need to be captured in the list of various transaction items (and best to get done early to maximise employee certainty around the transaction).
  • An area of focus for tax warranties in tech transactions is R&D tax offset arrangements, particularly given a lack of clarity regarding scope of eligibility for software development and increasing ATO focus on the R&D offsets, which could result in refunds for ineligible claims.

Episode 3: Joint Ventures, alliances and other strategic collaborations

From contractual to incorporated joint ventures, data sharing arrangements and everything in between, the structures and complexity of tech deals are less likely to follow the traditional M&A or investment path which makes tech an exciting space to be working in. Join our host Mia Harrison-Kelf, Corporate M&A team Partner, for a discussion with Peter Jones, Telecommunications, Media & Technology Partner, and Jamie McLaren, Corporate M&A Partner based in our Singapore office as they touch on the trends they are seeing across the APAC region and the drivers behind companies seeking out alternative structures.

  • Joint ventures, alliances and other strategic collaborations are becoming popular alternatives to typical M&A structures in many technology deals across the APAC region. Players in the tech space are increasingly seeing value in the use of flexible corporate structures that can be instrumental in ‘unleashing some of the momentum’ that is currently stored in the rapidly evolving tech sector.
  • There are many advantages to the use of joint ventures in this context, including the chance for parties to ‘try before they buy’ before committing to significant equity investments. Alternative structures also provide the platform for companies – from large, established investors to emerging start-ups - to harness the opportunity around tech innovation without necessarily putting the ‘mothership at risk in terms of historical value of assets’.
  • These structures typically involve one or both of the joint venture parties receiving or providing assets or services to the joint venture, such as partnerships between a challenger brand that has interesting IP or an innovative business model and a larger or incumbent organisation that has the data and infrastructure to leverage these assets. Valuation of assets or services contributed is key, as well agreeing up front the consequences of defaults in these contributions.
  • While incorporated joint ventures are very common in the tech space, unincorporated joint ventures can provide more flexibility from a contractual prospective. Parties can collaborate in one jurisdiction, while retaining ownership over potentially valuable IP and the flexibility to explore opportunities in other jurisdictions.
  • There are a range of potential challenges in joint ventures, alliances and other strategic collaborations in the tech space that need to be addressed early in the arrangement to align expectations of both parties and ensure a successful collaboration, particularly given parties often have different strategic goals, timelines and levels of organisational complexity.

Episode 2: Key regional trends in tech deals across APAC

Southeast Asia is said to be one of the fastest growing and one of the most active regions for tech deals in the world, so in this episode we’ll be taking a whistle stop tour around the region to talk about some of the key recent trends in tech transactions. Join our host, Malika Chandrasegaran, Corporate M&A Partner, with special guests Vik Tang, Partner and Head of Corporate in our associated Indonesian law firm Hiswara Bunjamin & Tandjung, and Victor Chiew, Director at our associated Singapore law firm Prolegis, as they discuss digital infrastructure, an increase in M&A deals and cloud hosting, tech companies acquiring banks in Indonesia, and how regulators are keeping up with the changing landscape.

  • There are lots of interesting and exciting tech deals going on in Australia and Southeast Asia right now. There has especially been an M&A and joint venture focus on digital infrastructure, including subsea cables, data centres, and towers. This demand has been driven by the booming digital economy and the need to prepare for the next wave of consumer tech including augmented reality and increased cloud services.
  • Digital banks are becoming increasing common across the region. In Indonesia, FinTech firms have been acquiring then converting existing small banks into digital banks; in Singapore, the country’s first entirely digital bank, GSX, just launched; Malaysia has granted 5 digital bank licenses; and Thailand is exploring creating a regime to license digital banks.
  • Regulators and governments have been generally supportive of e-commerce and foreign investment. There’s been an growing focus on crypto-regulation, personal data protection and preserving national security interests.
  • Changes to valuations in the current climate of rising interest rates and heightened volatility could drive bidder activity and change once standard business practices. For example in Australia equity value softness may lead to more interest in tech-enabled growth and increasing business’ tech capability. In Indonesia, despite conventional wisdom to the contrary, tech unicorns are starting to prefer domestic listings and use fewer offshore holding companies, given the uncertainty of overseas markets.
  • Overall, it’s an exciting time to be doing tech deals in Southeast Asia!

Episode 1: Welcome – the who, the what and the why of tech deals across APAC

Join Malika Chandrasegaran, Partner and Mia Harrison-Kelf, Senior Associate as they kick off our new podcast series which will explore the who, the what, and the why of tech deals across the Asia-Pacific region.

Key contacts

Malika Chandrasegaran photo

Malika Chandrasegaran

Partner, Head of M&A, Asia, Singapore

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Mia Harrison-Kelf photo

Mia Harrison-Kelf

Partner, Sydney

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Legal Notice

The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

© Herbert Smith Freehills 2024

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Melbourne Sydney Brisbane Perth Mergers and Acquisitions Technology, Media and Telecommunications Digital infrastructure Private Capital Technology, Media and Telecoms Malika Chandrasegaran Mia Harrison-Kelf