An M&A deal in China

And moreover, it''s in the tech sector.

In what marks a new trend of tech M&A, Asiainfo has bought a stake in Intrinsic Technologies.

The deal is interesting on several scores. Not only is it a deal between two Shanghai-based companies, it also marks a trend of a bigger, listed entity buying into a company with some proprietary technology which has the potential to be sold globally.

Asiainfo – which was advised by CSFB – has bought an undisclosed stake in Intrinsic for $8.2 million, with a two year option to buy up to 51% at valuations that increase over time. Intrinsic has been advised by Goldman Sachs.

This structure will allow Asiainfo to see whether the technology becomes as profitable as projected, and then use its option to get 51% and thus consolidate Intrinsic’s revenues with its own.

Both companies are keen to stress the synergies between the two. Asiainfo is a Nasdaq-listed company that provides infrastructure to Chinese telcos. Intrinsic is a software company.

Intrinsic’s proprietary software is causing a revolution in China. Basically, Intrinsic produces a software platform that allows mobile phone companies using GSM networks to look more like DoCoMo. China Mobile uses Intrinsic software and is at the forefront of this revolution.

The software allows China Telecom to open its platform to third party content providers. It takes care of all the billing and the security issues. China Telecom benefits from a revenue split with the content providers, normally keeping between 10-25%.

Like DoCoMo, this new content is proving to be all the rage among China’s growing mobile phone population. One particularly popular application is provided by Linktone over the Intrinsic system. It is called IQQ and allows users to play a multiple choice quiz for ever-increasing prizes. Players pay per three US cents per question asked.

Linktone (which is unlisted and also Shanghai-based) is about to launch a new application which will offer multiple choice questions based on the English language – hoping to cash-in on the current trend to learn English in Shanghai. It is called Doctor of English.

Says Intrinsic CFO Derek Sulger, “China Mobile is learning from the success of imode in Japan. It is having success because it is not trying to control content on its network, but allowing third parties to provide that content. This competition of information is good for everyone.”

He believes other Asian operators will learn from China Mobile’s success and open up their platforms too. That will mean using Intrinsic’s software platform.

“What we have,” says Sulger, “is a product produced in China that is a global product. It is an interesting statement in this WTO era of where China is going.”

He says Intrinsic will announce a contract with an international telco in the next few weeks.

How will the relationship with Asiainfo prove beneficial? Asiainfo is currently upgrading the billing systems at various telcos across China and replacing their legacy systems. With its huge salesforce, it gives Intrinsic the ability to spread its product across China. And Asiainfo has ambitions to set up an international salesforce too.

Intrinsic was founded in the middle of 1999 by CEO Jun Wu, who returned to China after a long career in Stockholm – where he worked for the mobile phone messaging company, Sendit, which was bought in 1999 by Microsoft.

Wu returned to Shanghai and hired 70 engineers to build Intrinsic in China. He chose to locate in Shanghai over Hong Kong, because it is seven times cheaper to operate there.

Sulger says the company is “damn close to breaking even” and reckons it will be comfortably breaking even by the third quarter.

CSFB’s Asian tech boss, Steve Foland says this sort of M&A typifies a new trend. “This is one of the models we will see in the future,” says Foland. “Leading tech companies will buy or take stakes in companies that have interesting technologies that complement their existing businesses.”

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