NetStar Group, a builder of internet network infrastructure, has agreed to acquire Comtech Engineering and Consultant Company, a Hong Kong-based systems integrator, for $80 million in stock. The deal creates one of the biggest internet network solutions providers in Greater China.
Comtech shareholders will receive one NetStar share for every 2.2 Comtech shares held. The transaction values each Comtech share at $9.63. All Comtech shareholders have agreed to swap their shares, NetStar says. Comtech's biggest shareholder is Baring Private Equity Fund, which holds 52.05%. Comtech managing director K.F. Cheung holds 19.23%; Intel holds 10.26%; and Vanda Systems & Communications holds 18.46%, NetStar says.
The acquisition is the second this year for Hong Kong-based NetStar, which aims to grow by purchasing small companies in the highly fragmented network integration industry. In March NetStar acquired Intelligent Building Information Systems, a Chinese systems integrator, for $5 million in cash and stock. After the acquisition of Comtech, NetStar will have 550 staff and projected revenue in 2000 of $150 million. The company expects to make a profit in the "high single-digit millions" in 2000.
"Part of our strategy is to do a regional roll-up to create a company with enough critical mass to compete on an international scale," says K.H. Wun, NetStar's president.
That means the company will need to generate revenue of between $400 million and $500 million, Wun says. StarNet has given itself two years to develop a regional business in Asia. Since its inception last year it has established businesses in Australia, Taiwan, Hong Kong and China. Next it will target Singapore, Thailand and Malaysia. After that, Korea, Japan and India. Finally, after a period of internal consolidation, it will tackle the US.
NetStar's goals are lofty, and it faces competition from the likes of Singapore-based Datacraft, which analysts say has better-known brand. There are also dozens of new companies entering the network integration and consulting market, which was worth $36.9 million in China in 1999 and is forecast to grow to $193.7 million by 2004, according to research firm IDC. Still, the growth of internet usage in Asia and the relative underdevelopment of network infrastructure in some regions offers NetStar an opportunity for growth.
"At this point Asia is still a growing market," says Howard Hsu, manager of IT services research at IDC Asia Pacific. "Even more developed regions like Hong Kong, where basic network infrastructure exists, will see the need for upgrades and other solutions over the next few years. For NetStar, once it gets critical mass, a brand name and an expanded customer base, the opportunity to roll up the market is certainly there."
To realize its ambitions, Wun says NetStar will need at least $100 million. It plans to tap the equity capital markets to raise it. NetStar is aiming for an initial public offering of its shares within the next 12 months on either the Hong Kong Stock Exchange, the Singapore Stock Exchange or Nasdaq. "We will do an IPO as soon as possible, but right now the market is so volatile there's no point," Wun says.
NetStar emerged from a management buyout last November of US-based Anixter International's Asia Pacific Network Integration business, which was launched early in 1999. The buyout was financed by ING Group's newly launched, $305 million Baring Asia Private Equity Fund, together with private money injected by the management. In January this year the company secured $1 million from AsiaTech Ventures $25 million Asia Technology 2 Fund.
NetStar puts together computer networks for institutions, governments and other organizations using technology from companies such as Cisco Systems and 3Com. Its customers include 3M, Acer, DuPont, General Motors, Chung Hwa Telecom, Nestle, Reuters, Sony and Standard Chartered Bank. Recently, it has started to expand its business to help companies install the software applications needed for e-commerce, such as billing and call centres.
Comtech installs cables and infrastructure to create so-called 'intelligent buildings', or buildings such as airports whose functions are automated. Its clients include Hong Kong Airport Authority, Beijing Capital Airport, Construction Bank of China, HSBC, Jilin Post & Telecommunication Building and People's Bank of China.
"They are in the same business as we are and they have skills which are very complementary," says Wun. "We don't make acquisitions for the sake of more revenue, but to acquire complementary skills and customers in the target markets."