JP Morgan invests in Asia TMT

JP Morgan ups its TMT dealmaker headcount amid flurry of deals in the sector.

Asia’s technology, media and telecommunications (TMT) sector has been a deep vein for deal-makers to tap --from Alibaba’s world-beating $25 billion IPO listing to the acquisition spree among tech titans such as Lenovo.

Given the growing wallet share in Asia and the relevance of the region to US clients, increasingly JP Morgan’s global chairman for TMT Jennifer Nason finds herself jetting out to Asia.

"I spend more time in Asia facing clients than I do in other parts of the world, apart from the US," said Nason, who was in Hong Kong recently for the US firm’s TMT conference.

TMT has been active this year and a lucrative revenue generator for investment banks. According to data provider Dealogic, it is the largest fee paying sector so far this year at $1.5 billion, roughly a fifth of core investment banking fees in Asia ex-Japan and rising nearly three-fold from a year ago.

In light of the growing opportunities in the region, JP Morgan is investing in expanding its TMT team in Asia. “Our Asia TMT revenues are up 50% this year. We have expanded headcount in the TMT team by about 25% this year and I'm still looking to hire a couple of people,” said John Hall, head of Asia Pacific TMT at JP Morgan, who relocated from the US to Asia in 2012.

Some of the M&A opportunities have been driven by US tech companies’ restructuring and sale of legacy assets. This offers opportunities for Asian companies keen to expand their global footprint.

“The re-calibration of large-cap US tech companies is currently ongoing and has resulted in spin offs and asset sales for which Asia companies could be acquirers," said Nason.

A number of US tech titans have announced plans to split their companies up, under pressure from activist shareholders. In September, EBay announced plans to spin off PayPal next year, following calls from activist shareholder Carl Icahn. According to media speculation, Alibaba might acquire PayPal.

In October, Hewlett Packard similarly announced plans to separate its personal computer and printer business from its enterprise unit, which focuses on business clients, following pressure from hedge fund Elliott Management.

Large US tech companies have already been selling assets to Chinese buyers, with Lenovo’s acquisition of IBM’s server business and Google’s Motorola Mobility business this year being examples of this.

Chinese internet titans buy

Chinese internet behemoths such as Alibaba, Tencent and Baidu have been busy taking minority stakes in companies to boost areas they are weak in. This has spurred deal-flow though only a handful of companies hire banks as advisers. Cross-border outbound M&A in the Asia TMT sector has more than doubled to $10.3 billion year-to-date compared to the same period last year.

Alibaba for example, bought stakes in Youku Tudou and AutoNavi, which offer video and mapping services, while Tencent took a stake in ahead of its listing to beef up its e-commerce.

“Chinese Internet companies are well capitalized with strong balance sheets,” said Brian Gu, co-head of China investment banking at JP Morgan. Many of the top players are looking abroad at the US for complementary capabilities. The spillover effect of the investment phase is still going on,” he added.

For now, the lack of clarity over whether the Chinese government sanctions the variable interest entity (VIE), which many Chinese internet companies use, is holding back deal flow but this could potentially change. A VIE structure is legal structure that enables a Chinese business that is wholly or partially foreign-owned to have effective control over the company which holds the licenses needed to operate in a restricted domestic area such as technology.

"The VIE structure prevents a lot of larger mergers in the Chinese Internet space because once the deal crosses a certain size threshold, you likely need to seek Ministry of Commerce of the People's Republic of China (Mofcom) anti-trust approval and no one has sought approval believing Mofcom will be hesitant to review such a case to avoid validating the VIE structure." said Gu.

"That limits the deal activity, but there is an expectation that the Chinese regulators will relax its stance towards VIE related transactions in the near future. Once that is done you will see more consolidation in the space," he added.

Chinese tech IPO re-emergence

The Chinese internet sector has seen a coming of age, with a number of Chinese tech companies flocking to the US to list, topped off by Alibaba which listed on the New York Stock Exchange in September. The stock has since nearly doubled and on the back of its success more companies are expected to list in the US.

"Chinese tech has been a tremendous coming of age story," said Nason. "The market for US listings was shut down for a couple of years but there has been a re-emergence," she added.

JP Morgan was a bookrunner for Alibaba's IPO and's $280 million IPO in April. Equity capital markets activity is the most profitable segment of tech investment banking, accounting for $1.1 billion or 80% of the TMT revenue pool this year, according to Dealogic (see below).

Asia ex Japan TMT Revenue 2014 YTD


While more tech companies are expected to list next year, there is unlikely to be a repeat performance. “Tech companies typically need to wait till they are mature enough to be listed. We expect to see more Chinese tech listings in the US next year, but the overall volume will be less than this year in absence of a mega IPO such as Alibaba," said Hall. "If this year was a 10 ft wave, next year is likely to be a 6ft wave," he added.

Alibaba trades at about 51 times its estimated 2015 earnings according to Bloomberg data. Its lofty valuations and investors' hunger for exposure to the internet sector is reminiscent of the dotcom boom and bust. However, ultimately, whether the market stays open depends on whether companies such as Alibaba can deliver on their growth promises.

¬ Haymarket Media Limited. All rights reserved.
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