Korea sets sights on tech M&A

The government is seeding two VC funds given special privileges to invest in Korean IT M&A opportunities.

The Korean Ministry of Information and Communications (MIC) has seeded two local venture capital firms to invest in information technology M&A situations. MIC has put $50 million in two seven-year IT M&A funds run by STIC Ventures and KTBnetwork, which are now in the process of raising an additional $25 million each from domestic or foreign investors.

This move may herald a shift in Korea's IT M&A industry. The government is keen to see more M&A activity, and putting money into such funds is a shot across the bow. It follows streamlining the red tape that surrounds mergers and acquisitions. For example, backdoor listings have always been allowed but required a lot of paperwork. Such problems have been addressed on the regulatory level.

More interesting is that these two MIC-seeded VC funds have been given a freer hand in what kind of exit strategies they can make, says Lee Dong-ik, managing director at STIC in Seoul. He notes that the law bars VC funds from buying existing shares in a company from other shareholders or buying shares in public companies. There are also limits on the amounts of equity investments VC funds may hold. This has meant that the only viable exit strategy has been the IPO, and given that tech start-ups are on the sagging Kosdaq market, M&A in Korean tech has lost its lustre.

The MIC-seeded funds have won exemptions, allowing them to do more than just act as minorities in start-ups; instead they will be able to do roll-ups, mergers, buyouts, PIPEs (private investment in public equity) and joint ventures. These strategies are common in the United States but very rare in Korea. "The MIC sees the need to diversify its exit strategies," Lee says.

The two funds will focus on investment opportunities taking advantage of Korea's IT products and markets. They will target expanding or market-leading Korean tech start-ups and consolidation plays.

The funds are also free to work with partners. STIC, for example, is talking to US firms Athena Technology Ventures, a Palo Alto, California-based VC firm focused on telecom companies with a Seoul-based sister fund, and Broadview, a Boston-based M&A adviser, about providing both financing and expertise.

STIC Ventures is the VC arm of STIC Company, which manages 12 funds over a total of $280 million. KTBnetwork, formerly known as Korea Technology Development Corporation before it was privatized, is Korea's oldest and largest VC group, established in 1981. It manages $692 million as of end-2002.