Amit Anand
The recent IPOs of several tech companies in Southeast Asia might give investors cause to wonder if the time is ripe for exits and consolidation in the region.
If you’re thinking along those lines, you aren’t far off from the truth. An analysis of recent changes in the market reveals four factors that are set to catalyze consolidation in Southeast Asia in the near future.
Startups have cash and are looking to spend it
After fundraising multiple times, there are a number of large and late-stage tech startups that have ample liquidity and are increasingly open to pursuing growth inorganically.
Recent M&A in the region indicates two key strategic considerations influencing acquisitions:
- Adding new product segments/verticals or markets into offerings.
- Strengthening their existing offerings (verticals or markets).
For instance, Grab acquired Singapore-based robo-advisory startup, Bento, in 2020. The acquisition was mainly driven by the strategic consideration of adding a new product segment, because it helped Grab bring retail wealth management and investment solutions to its users and partners.
The acquisition of the Singapore-based home renovation platform Qanvast by Livspace in 2021 is an example of the second strategic consideration. This acquisition helped Livspace strengthen and consolidate its position in existing markets (Singapore and Malaysia).
We’ve summarized some more examples of strategic acquisitions below:
As cash-rich tech startups become keener to seek inorganic growth, consolidation is likely to pick up.
Companies are expanding across regions and countries
Southeast Asia is culturally diverse and countries here are different from each other despite their geographical proximity. The region has 11 countries with a wide range of cultures, ethnicities, languages, religions, economic development status, etc., which give rise to very different consumer behavior and market characteristics.
As tech companies from neighboring countries and regions expand into Southeast Asia, the region’s diversity and differences pose challenges to their expansion, since each country likely requires a unique greenfield approach.
Compared to building operations from scratch, an acquisition is a much quicker alternative to entering the region and securing the necessary talent and expertise.
For example, Indian fintech Razorpay earlier this year forayed into Southeast Asia with the acquisition of Malaysian fintech, Curlec.
Another good example is the merger of Indian payments company ECAPS and Ayannah, a Philippine digital financial services provider. The merged company aims to offer affordable digital financial services to the middle class in both South Asia and Southeast Asia.
Widespread fragmentation
Although the region’s diversity creates challenges for tech companies from other regions and countries, it makes for space in which smaller, homegrown tech companies can develop.
That is a major reason why some sectors in the region have become crowded and fragmented, which makes these sectors ripe for consolidation.
Let’s consider the digital payments/e-wallets vertical in Vietnam, where the government has reportedly granted more than 30 digital payment intermediary and e-wallet licenses. Major players in the country include MoMo, Moca (partnership with Grab), ZaloPay (part of VNG), ViettelPay and VNPay.
MoMo has emerged as a clear leader — its valuation surpassed $2 billion at the end of last year, and it reportedly has 31 million users in Vietnam alone (~30% of the country’s population).
It isn’t difficult to see major players like MoMo consolidate their position in the coming years by acquiring smaller players.
Another sector that we believe could see future consolidation is quick commerce, also known as q-commerce. Food delivery platforms have seen M&A aplenty in the past few years, the new golden child for consolidation appears to be q-commerce, which promises to deliver groceries in 15 to 30 minutes.
Q-commerce is highly fragmented, as almost every major tech company/food delivery platform in the region offered their own take on it during the pandemic. Besides, there are numerous stand-alone players in this vertical, such as Bananas, Astro and Dropezy.
With the COVID-19 pandemic gradually easing into an epidemic, the market opportunity for q-commerce remains to be ascertained. Therefore, we expect companies that don’t have the right scale and efficiencies could face difficulties and be swallowed up by their larger rivals.
Pursuit of super-apps
Many tech startups in the region are looking to enhance user engagement and increase monetization, which has led a number to aggressively develop and expand their own ecosystems. By having more varied offerings, these startups are aiming to become “super apps.”
This has resulted in an increasing overlap between startups’ offerings, setting the scene for more synergistic consolidation and investment.
One example is Malaysia’s AirAsia, which recently changed its name to Capital A as it seeks to become more than a low-cost airline. To counteract the travel curbs during the pandemic, the company has proactively expanded its services and offerings to develop an ecosystem of its own.
Its super app now offers ride-hailing (AirAsia Ride), food delivery (AirAsia Food), fintech (AirAsia Money) and other services across Malaysia. The company entered Thailand last year by acquiring Gojek’s operations in the country. And after launching its financial product marketplace and food delivery service in Indonesia, it is looking to expand further.
VNG, being the first unicorn in Vietnam, is another aggressive player developing a super app. It began as a gaming company, but VNG has expanded to offer e-commerce (Tiki), a social messaging platform (Zalo), digital payments (Zalo Pay) and more.
In recent years, the company has proactively invested in other startups to enrich its ecosystem. Since 2021, it has invested in six startups to bring more services to its users, including a digital gifting and reward platform (Got It), a B2B e-commerce (Telio) and logistics (EcoTruck).
As more tech companies look to the super app business model to retain users and increase monetization, we could expect more inorganic expansion and consolidation in the coming years.
Against the backdrop of shaky global equity markets and geopolitical tensions, the catalysts highlighted above are on track to drive a plethora of strategic exits and consolidation in Southeast Asia’s tech ecosystem.
Disclosure: Jungle Ventures has a financial interest in Livspace, Betterplace and Moglix.
Comment