May 2010 Tech M&A Monthly

May 2010 M&A Report

Asia Rising

 

Dougan Milne

 

Good day. I believe from last count we had attendants from 18 countries registered today. I would like to welcome you all to the official rebroadcast of the Corum monthly update from May, 2010. If you are a regular attendee of the Corum webinar, you will notice that our format has changed slightly for today's event. Instead of rebroadcasting the entire event, we will just be rebroadcasting this month's special spotlight presentation, Asia rising.

 

This segment should take about half an hour and it is particularly data intensive, so I'm hoping to hold your attention for the whole 30 minutes.  I'm Dougan Milne, director of research for Corum's global team of analysts. Previously I was with Corum's European headquarters in Zurich, Switzerland, where I was primarily focused on the international markets, for nearly 40 years. I've been back at our global HQ since, here in the Seattle area, for the past several months, and as easy as it may be to assume that my focus has returned to the North American market, the truth, in fact, is quite the opposite.

 

Software M&A has evolved so much over the past few years, that specializing or limiting oneself to a specific domestic market actually puts your M&A practice or knowledge base at a major disadvantage. So, that said, I'm actually very excited about today's presentation, our spotlight for the month, which focuses on the tremendous growth that we've been watching in Asia over the past few years. Corum has further penetrated into this region and we have accomplished some excellent client success over there, and we wanted to develop a brief, but intense snapshot of some of the fundamental changes that are occurring in Asia and what these shifts in power mean and not just for our clients or for our webinar viewers, but also the team here at Corum as well.

 

Today we have a condensed summary of the Asian market, where it has evolved, where it will continue to evolve, and there is a lot of information here today, so stay with me feel free to ask question by Webex, by email, or by calling us directly here at Corum. We will be happy to answer your questions, especially if this stirs up some brilliant ideas about your company or some concerns, some red flags about the company based on what you see here today. 

 

I set up the agenda for the presentation, we'll start with some very high level economic data, show you the perspective section, and from there we'll look at software trends in certain markets as well as the investments to be made, and then lastly we'll have a closer look at the major buyers and sellers in this region, in the context of M&A. 

 

So we'll start with the global GDP stats here, and this is the world as we know it today. The US is and has been for a long time, the global leader in GDP. I think we finished 2009 with some $14.2 trillion dollars, and just below that we see the EU5, that's Goldman Sachs' index of the five largest economies in the EU, with the next largest independent country being Japan, of course, and then quickly catch up to them is China. From there we have a pretty standard list of Western Europe, with recognition for emerging economies like Brazil and Russia. Do me a favor, try if you can to take a mental snapshot of this image here, this chart, in fact if you're really magical, maybe you can even remember their order, because on the next slide I'm going to show you a very similar, but actually very different chart.

 

These are the global GDP stats, as predicted by Goldman Sachs for the year 2050. Now, aesthetically it looks very similar to the last slide, but statistically this is a very different picture. In 2050 China has not only become the world's largest economy, but also on a scale to swallow the rest of the world. The US holds tight at second place, closely followed by India as the third-largest economy. In fact, if you look at the top ten countries on this list, you will recognize that very few of them were on the last list. In fact, five of the top 10 of 2050 will be Asian economies.

Beyond Asia, Russia and Brazil move up the food chain and Europe now barely exists in the top ten, unless of course the EU ends up permitting Turkey, who made the list here. Even looking at the bottom 10, you certainly won't recognize them from today's dominant economies, and this is a reality that we are quickly approaching. The question here becomes will your company be prepared to take advantage of this, or will it simply fall by the wayside?

 

This is a funny-looking graph, it has these worm-like lines, and it is actually a graph I pulled from gapminder.org. If you aren't familiar with this website, but you're interested in global statistics like myself, I highly recommend you jump on their website and play around with their data tools. Without any dispute, the most phenomenal web-based statistics tools on the Internet today.

 

This is a chart of income per person. You'll notice that I'm dating this one all the way back to 1858 and some of my colleagues have asked what the heck I was doing. The date is basically completely irrelevant, but I'm going to try to emulate a brief but important history lesson that was taught by Hans Rosling at the tech conference in Mumbai, India. Just for reference, we have the US in yellow, the UK in orange, China is here in classic crimson and India is blue.

 

So in 1858 there were a couple of significant events that occurred that shaped economic powers for the rest of the world for the next 200 years. India at this time was officially under British rule, the British had exiled the last Mughal emperor to Burma and it becomes a colony of the British Empire. In China, in this year, this is the end of the Opium Wars, where China submits to the British Mercantile Port Authority. As I understand it, this opens up all of China to British merchants, accepting foreign imports and internal transit. In real layman's terms, China becomes essentially stopped for the next 100 years and completely unable to conduct trading without British blessing.

 

So we have about 100 years of complete non-growth here, until within just a short time of each other, two more major events occur that start immediate growth cycles for both India and China.

 

In August of 1947 India declares independence and becomes a sovereign nation. Then, in October of 1949 Mao Tse-Tung unites his nation as the People's Republic of China. Despite all the ill side effects of the Soviet model communist regime, the Mao era was the kick off point for China's growth and prosperity. Of course, there was more dramatic growth in China at the end of the post-Mao era, in the late 70s, and that is when the true “hockey stick” appears here on the chart.

 

In case you're wondering, and I'm sure you all are, leading economists all expect that China and India will reach average income levels comparable to their Western counterparts by roughly 2035. So that's just 25 years from now. Think of the world as you knew it in 1985, and think about where we are today, and that's a good way to consider where we'll be 25 years from now. It's fascinating.

 

Speaking of back in time, I don't think there's any way to dispute the single greatest societal influence in the last 15 years has certainly been the Internet. So let's look at this next chart, with sources from the data at the World Internet Stats Group and it was generated in January of this year so it's still very relevant. In case there were any ancient assumptions that the Internet was primarily a blessing for the Western world, I think these statistics clearly put that to rest. Look at the Asian Internet usage versus the rest of the world, it's really quite profound.

 

If those numbers weren't shocking enough, just try to fathom the implications of this slide in the context of the last. The last one showed us over 750 million Asian Internet users, and yet the penetration numbers show us that represents only 28% of the Asian population as Internet users! Take a second to process that, it's actually kind of frightening. The attainable growth that is still available in those markets is nearly incomprehensible.

 

Lastly, this is the breakdown for usage for the top ten countries in Asia. China alone has more Internet users than the entire combined population of the US and Canada! I've also got this pie chart here, that illustrates that within the next two to three years Asia will make up 50% of the world's Internet users.

 

We've seen GDP, we've seen income and we've looked global Internet usage, let's look at the mobile contracts out there.  I'm not going to spend enough time on this slide for me to really give a full understanding. These stats are compiled by the Wireless Intelligence Committee and basically what you need to take away from this is the fact that in red we have all the Asian mobile contracts and the other colors represent the rest of the world, the royal blue color is the US and Canada. Wireless Intelligence calls these connections. Now, in North America, most mobile service is in contracts, essentially we're selling our soul to these two-year contracts with terrible service and you end up paying way more than you thought you would every month, and that's pretty standard here. Across the globe, however, there's other models, pay as you go, pay per minute, prepaid, etc. Simply put, a connection is any person with a mobile device who is paying to transmit data. The takeaway point from this certainly, is that by 2013, 50% of global mobile users will be in Asia.

 

Asian mobile penetration, we'll take a quick look at Asian penetration rates, we see a very broad spectrum here, in some of the wealthier countries, the wireless infrastructure quickly became far more dependable than the wired line services, which lead to these penetration rates, in Hong Kong, Singapore, etc. Imagine, in Singapore, the average person has two wireless devices! On the other end of the spectrum, of course, we see some of the most interesting cases for growth, quite frankly, specifically China and India, which together only average about 38% adoption rate. You figure some of these western wireless carriers, ISPs, must be salivating at the thought of this market, imagine the bottom line, how it is effecting the slightest growth in these markets, it's staggering.

 

We're moving into our trends and investments part of the agenda, and as I mentioned before, we'll continue to get more as we go through this. At this point, we'll look at the Indian software industry as a whole. We regularly hear the term developing nations. While that is increasingly becoming something of an irrelevant term, it does exist for a reason. There are a lot of troubles here, there is infrastructure, poverty, clean water, and so on, but one of the troubles that we run into is the lack of consistent business practices. There is a lack of enforced governance reporting, which can make gathering data a pretty difficult task. So thankfully in most of our major developing markets, particularly India and China, this is not entirely the case. Countries like India are quite proud of their numbers and they have rich numbers at that. So let's look at a couple of them. 

 

So, despite this 3% global decline in tech spending for 2009, India still has software export numbers exceeding 6%, I believe it was 6.8%. This year they expect to see this statistic moving substantially faster, 15%, which should heavily outweigh 2009's total of $50 billion in exports. Meanwhile, IT services comes in at 6% of India's GDP. There is no single industry in the US that accounts for that kind of percentage.

 

You'll see I've noted some of the hot sectors that we are seeing in India. Understand that when you are looking at these, there is actually a path of logic for most of them. IT, VPO, and web development, those are always going to be front and center. But when you look at India's other major industries, you start to see a picture taking form. In the wake of that, they have actually been building extremely integrated and efficient supply chain management solutions around that industry. Another example, while we're increasingly hearing Indian accents on the customer support line, the outsourcing of customer support draws from any number of companies for solutions for these call centers and customer experience centers that are bringing even further competition to the west. 

 

Likewise, India's recent educational reform has brought about just an absolute wave of web-based and license-based education, mainly targeted at K-12, but also with some vocational education services as well. The amount of deals that I have seen in the education space from India, greatly outpaces that of the Western solutions. I don't know if we should be reading into that or not, but it could have some major significance.

 

Of course, a naturally social culture, they are apparently in love with gossip as a former British colony and with Bollywood, etc. All of this has shaped a very prominent software industry's social perspective. In fact, comScore recently reported that some of the fastest growing news blogs on the planet are based in Mumbai, New Delhi, and Bangalore.

 

So we saw India, let's take a look at China, the elephant in the room. Again, phenomenal growth statistics this year, apparently they were in a global financial crisis last year, but that didn't seem to stop China from seeing 25% growth in their software industry. Further stats tell us that China is on track to average about that same growth over the next few years. The software industry reached $140 billion as of the end of the 2009.

 

We again look at the hot sectors, and now try to envision where this is coming from and how it came about. The dominant part of their software culture, and an increasingly significant player is the manufacturing of consumer electronics. The Chinese have developed an expertise in embedded systems. China has very interesting regulations for outside vendors selling security software within the country. The government has said that any security software being deployed in China must be developed on Chinese soil, by Chinese programmers. There are some obvious security reasons for this, but essentially these regulations respond to a quickly growing economic model. In China, because of their own needs for infrastructure, they have actually become quite competent in this space. Lastly, a booming phenomenon in the games sector. Traditionally, Asia has been a heavy player in this space, mainly with the likes of Japan and Korea, but what we have witnessed in the past few years is the explosion of web-based casual and hardcore gaming with China. The M&A front has been littered with Chinese deals, both buyers and developer studios. We're seeing China buying up some of the major titles from Japan, Korea, and the US, and vice versa.

 

Asia Pacific 17, in this slide I've taken some of those same hot sectors and extended them to some of the other major Asian economies. I've tried to partner the countries by complementary accounting performance and synergistic technology focus. Japan, Korea, and Taiwan are actually quite comparable because they have all had a long history in the software world. As far as their specialties, great operating systems, also some of the world's major consumer goods manufacturers, so we see the big engineering platforms coming from these countries or foreign players building major HQs in these countries. Again, the gaming space is huge here as well.

 

The Philippines, Malaysia, and Thailand, I'll tell you, some of the biggest and most frequent call center HR acquisitions I've seen in the past 18 months have come from these countries, Indonesia as well. Also very big players in hospitality, ERP, and the travel space.

 

Singapore and Hong Kong are definitely the financial centers of Asia, no major surprise, most major Western firms have planted their Asian HQs  here as well. With the somewhat smaller populations, there has also been a need to develop internal ERP and some business decision making tools, which they are exporting as we speak. Big players in the Asian telecommunications area as well.

 

Then, Australia and New Zealand. I needed to put them on here, because they often get lost in the mix of Western and Eastern, though by all accounts, both countries have been prominent players in the global software market. Corum has concluded several successful transactions with both buyer and sellers in these countries. Of course, because of their resource-rich nature, energy, mining, environmental solutions, perhaps their strongest and biggest stable, and along side that we've also seen a handful of major financial players, and they are also building in services and solutions for the healthcare industry and in media right now. 

 

I want to talk briefly about the investment cycles happening right now in Asia. I've shown you a lot of stats, which all seem to be pointing in the same direction, that is, up and to the right, but when we look at the global venture capital, this is where we get a little skewed. I've taken these numbers and created this chart for the Dow Jones group and clearly the US, the blue, at 70%, shows us that still today the vast majority of VC money is being invested in US growth companies. China is represented in red, with about 8% global investment. India is in green with 4%. Europe in gray is the only major force that lost momentum in VC investment. The question here is what is the explanation behind the low funding in Asia?

 

At Corum, we interact with the VCs on a daily basis, we understand the market and the models very well and there are a few things that are frightfully clear to us. We all remember 12, ten year ago, that time of enormous prosperity, there was a cycle underway that was undoubtedly the greatest growth potential of our lives, there was the dot com boom, it was an incredible phenomenon. The VCs were throwing billions of dollars at it. They didn't quite understand the technology, they didn't quite understand the business models, everything was new and not yet proven. Despite the golden horizon, everything was still a little iffy. Despite all that potential, which was eventually realized and which is being realized now, although it took much longer than originally thought, despite that, there was a lot of money lost in those unrefined business models and the unproven technology in those unseasoned entrepreneurs. Likewise with some of the unseasoned investors. What we have in Asia is actually a very similar situation, but in many ways far more complicated. For every dollar of potential, there is some guy telling you he knows how to do it better. There are about 3.5 billion of those dollars. If you then couple that with highly regulated markets and a lot of government intervention, it is far outside the Western mindset for business practices and ideals. There is a whole new world of entrepreneurs who want to modify the models and and methods. There is a fundamentally different way of doing business, it is very complicated situation.

 

Private equity investment has certainly been higher than VC money, but those are different ball games, depending on different companies at different stages of their lives, and there is no clear path. There is just time here. The VCs will step up, it's just going to take a lot more experience in the region before it happens.

 

That brings us to the M&A section, the last section of this presentation. I had a tough time with this, because I've been compiling data for months or years, depending on how you want to track it, and I have more data than I know what to do with, which begs the point: If any of this has raised any questions or comments and if you would like to take a closer look at what the activity is like in your sector in Asia, or if an Eastern buyer may be in your future, please don't hesitate to give me a call and we can chat about it, I'm happy to make the connection.

 

We'll start off on the national scale and then work our way down to the specific deals and players, both buyers and sellers.

 

This is the first of a couple of charts here, this is for India and the next is for China. As I mentioned, India has done a great job of publicly reporting their data and you can see from these total M&A values that the growth has been phenomenal. A little bit of a stumble in 2008-2009, but 2010 is already off to a great start and is looking to outpace 2007 for M&A values.

 

Likewise, the China M&A values are unbelievable. This is a similar to chart to India's, but there was less of a stumble and higher numbers. I didn't have access to BE numbers for all the years, so I just used strategic as our totals in the latter half of the chart there.

 

I want to jump right in to some of the deals that we're seeing, so let's start with Japan. NTT, currently one of the heaviest global acquirers that we track (in fact, we've been in discussion with them regarding multiple clients serving different industries) and you can see from the acquisitions list, that location is of little concern to them. They seem to be Asian-centric with their transactions, but in fact we've seen other acquisitions with them in Europe and in North America. Dentsu is a global advertising firm. This is becoming a trend worldwide, low tech advertising firms, traditional firms, are buying up a lot of the international media and advertising technology companies. This is an interesting dynamic.

 

On the hot list are two of the classic Japanese players, plus several of them are climbing the ladder, GrapeCity, a big player in the HCRM space, they are also heavy into media. DNA is big on the Internet development side, advertising as well. 

 

In Singapore and Hong Kong, there are some interesting deals here, VODone has done several transactions in the social space over the past few months. They recently started going after the Chinese social networks with Domouse and Dragon Joyce. Singapore Systems moved in on some of the assets from the large Philippines space, Ayala. Then CEC, originally China.com, which then spun off an HQ in California as a CRP enterprise systems center, now publicly traded in the US, a big name acquirer over the past few months in the US, clearly they are still interested in Chinese and Hong Kong technology.

 

Next, we have the Philippines, Malaysia, Thailand, even Indonesia and Vietnam. Last year we saw Valdo from Indonesia spend about $10 million on Winsource for the call center services. Host Union of the Philippines has become a big global player in the hospitality space, we saw them paying nearly $30 million for a company from Germany, which is a leading hotel IPTV provider. They have deep roots in European hotel chains. So that Filipino hospitality model is moving in on Western Europe.

 

MindTree just bought 7Strata for their remote network monitoring. Emtec, in the US, bought out Sark Infotech for embedded mobile depth. Going in the other direction, Rolta bought US-based OneGIS, a leader in geo information systems. Nevales acquired Syntesia from Sweden, which is in the united threat management space, a total of 560 reported M&A transactions involving buyers and sellers there. There are just a lot of deals.

 

Lastly, we look at some of the other hot players, certainly there are far more than I could jot down here, this is just a good sample. I talked before about the growth in the education space. Two of the leaders here are Edserv and Educomp. Of course, Wipro and Tata among the largest IT services firms in the world, and then the smaller service firms like those listed here. Glodyne has been active in a couple of recent transactions to build their workforce management product portfolio as well.

 

In China, we have Pansoft acquiring energy inclusions management developer HongAo. Vocus, a US publicly-traded company in the public relations software on demand space snagged BDL Media, who essentially does the exact same thing in China, so there's some global footprint activity there. China Auto Logistics, CAL, is getting bigger and bigger. They picked up goodcar.com, which is basically the Chinese version of Autotrader.com. The auto business is getting really big in China right now. The 9, a Chinese game publisher, we talked about that recently, they bought the US game studio Red 5. We talked about the Chinese game industry which is booming, getting very international, this was about a $20 million deal.

 

Sticking with games, watch out for Shanda. They are already coming into competition with some of the other Tier 1 players in the US and Japan. They are making acquisitions left and right. They don't care where you're from, as long as the game titles are hot and they know they can make a buck on them. We all know the Google Baidu story, with Baidu now the third-largest search provider in the world.

 

Another company I've talked about in the past is Kingdee. I've been watching these guys for a couple of years and they continue an acquisition rampage. If you want to make comparisons, they are very similar strategy to say Sona here, originally data management, with Sona here in the US essentially acting as GRP rollup for the Chinese market. A lot of companies are growing very quickly, keep your eyes open for the next few years, and don't be surprised if you see some of these companies moving into your market.

 

One of the areas that I didn't have time to get into today is the extraordinary boom that is happening now in IPO and public markets. Clearly India and China are leading this trend this is just a phenomenal growth story, especially compared to the Western, and particularly the North American markets.

 

That just about does it for the spotlight presentation. The process of putting all this together was in itself very educational and very eye opening and I hope it has been equally informative for our viewers today. It was a lot of information, I know.

 

Our last slide here is the upcoming schedule of Corum events. If you are interested in meeting any of the Corum members in person or if you would like a crash course in education on how to prepare you and your company for eventual strategic exit, please check out our calendar and find out when the next event is happening in your neighborhood.

 

Thanks for your attention and time today, and thank you for joining me for the spotlight presentation of Asia Rising.