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MergerTech Blog – Visa and Interpreters Required
Ash Sethi – Analyst, MergerTech
As technology services and products become more fungible across borders, more American and European IT firms are looking towards expansion into emerging markets to drive their next phase of growth and product innovation. While IT conglomerates have been actively operating in emerging economies for several years, mid-market players are discovering that they are well positioned to quickly establish competitive edges in mid-range products and services within Asian markets, which multinationals typically overlook.
Yet establishing a Greenfield operation in a foreign environment requires extensive investment in hiring a capable management team, added physical and regulatory overhead costs, and an operational learning curve that can depress margins for 1-3 years from inception. A less capital intensive, precarious, and more efficient approach is to enter a new market via acquisition of an existing firm.
North American and European IT Services firms committed to getting a footprint in emerging Asian markets through an M&A strategy will however face several hurdles. First, there will be a need to learn the target geography’s business, investment, and economic climate in order to comprehend the unique dynamics of their operating market and develop a thorough sense of what is available. Mid-market firms make for attractive buys as they can round out the product and service offerings of an acquiring company without adding a redundant portfolio. They are doubtful however to be household names outside their own country and are not likely to share company information with competitors.
Next, American counterparts to mid-market Asian IT services firms with revenues of $20-75m and headcounts of 250-1000 employees will have a difficult time identifying potential acquisition targets because these companies typically focus on niche services and products and do not operate in the same segments as larger, more well-known and overseas competitors. Particularly in China, India, and Korea, foreign IT conglomerates have overwhelmingly focused on high-end service sectors, leaving the faster-growing mid-range segments of the Asian IT market relatively untouched. This limits the level of public market intelligence available on these sectors.
Lastly there is the matter of understanding how to structure an M&A transaction without being perceived as a threat by either local firms or government agencies, both whom can be very swift in pooling resources to push out foreign competitors, drive down operating margins to unattractive levels, or impose cumbersome regulatory restrictions on the acquirer such as requiring quotas of locally produced components. Thus understanding who the tertiary, sometimes invisible players in a cross-border M&A transaction are and how to efficaciously negotiate with them is a vital prerequisite.
While these challenges may seem formidable, the rewards for successfully entering new markets are immense. Asia is rapidly becoming a highly competitive market for IT services firms, and the path to success for foreign companies will depend on their ability to capture positions in mid-market products and services. In order to find lucrative opportunities overseas it takes the services of an M&A advisor who knows both the business space and the investment climate.