Weta Digital's sale to US firm Unity Software was one of three billion-plus deals over the past year. Image / Supplied
Weta Digital's sale to US firm Unity Software was one of three billion-plus deals over the past year. Image / Supplied
A report by Clare Capital for Callaghan Innovation reveals an explosion of merger and acquisition activity from $750 million to $11 billion over the past 15 years in the tech sector that the Crown agency has supported with grants and R&D support.
Clare Capital principal Mark Clare says it's nosurprise that the period coincides with the rise of SaaS. The initials stand for software-as-a-service, or software that operates over the internet via the cloud - rendering many of NZ firm's traditional challenges of geographic isolation irrelevant (what has emerged as our most valuable company, the NZX-listed Fisher & Paykel Healthcare, happens to be a hardware company but falls outside the scope of the report.
Clare identified four periods. The first, the "Big Bang" - 2006 - was the year that SaaS success story Xero was formed, although its signature event was the sale of Wellington-based Trade Me to Australian publisher Fairfax for $750 million.
"There is a long history of technology in New Zealand, but that is when the money got serious," Clare says.
Trade Me is also Exhibit A in another crucial respect.
The tech scene M&A deals of the past 15 years have been almost exclusively one-way traffic as offshore players have picked off Kiwi firms.
The investment community argues that offshore sales are a good thing because they give a company the wherewithal to attack global markets - and much of the profits are reinvested in the local ecosystem. And Trade Me founder Sam Morgan is the poster boy in that respect, having gone on to become a key early backer of Xero and Vend, among many other startups.
And Rocket Lab founder Peter Beck, who reached billionaire status with his firm's Nasdaq listing, has put money into two startups that have now achieved substantial valuations: Partly and Halter, plus early-stage companies such as Heart Lab and Astrix Aeronautics.
That reinvestment trend is just as well, given the overseas buyer-heavy nature of the M&A. (Even the two notable locals doing acquiring lately have an offshore pull themselves; Xero is now listed exclusively on the ASX, while Rocket Lab is now incorporated in the US and listed on Wall Street.)
The highlighted deal for Clare's "take-off" period (from the lull of the GFC to March 2015) is the sale $136m sale of Auckland-based Banklink to Australia's MYOB.
And for the period from 2015 to November this year, which saw total M&A activity rocket to $4.2 billion, Clare highlights three deals, which again are all techs heading offshore:
• Trade Me's $2.6b sale to UK private equity firm Apax (which followed Trade Me coming home again, to a fashion, with an NZX listing);
• Christchurch-based geologic modelling software firm Seequent's $1.5b sale to Nasdaq-listed Bentley Systems; and
• The recent sale of Weta Digital's tech division to US 3D gaming company Unity Software.
There were plenty of other examples Clare could have picked from the past 12 months, including Mighty Ape to Australia's Kogan for $128m, the sale of the $500m Hawaiki Cable to a Singapore firm, the $100m-plus sale of EzyVet to Nasdaq-listed IDEXX Laboratories, the $203m sale of mobile gaming outfit Ninja Kiwi to a Scandinavian firm for $203m, US private equity giant KKR taking majority control of Dunedin-based Education Perfect in a deal valuing the firm at $455m and Timely's $135m sale to Denver-based EverCommerce.
Peter Beck: "Kiwis, we are good at tech. But we also have to acknowledge that we're a small country, And when our tech companies are successful, we also have to be cognizant that they need to go global. And when they go global, we should celebrate that and not lament that we lost another New Zealand company." Photo / Dean Purcell
Clare's broader "Acceleration" period also saw a number of other $100m-plus deals, including the sale of Auckland wireless power startup PowerbyProxi to Apple (Apple got to keep millions in Callaghan grants, as long as it kept R&D in NZ), and China's Tencent taking an 87 per cent stake in our most successful game developer, Grinding Gear Games.
Last week in an online event organised by then-National leader Judith Collins, Beck noted that private equity funding NZ startups was at an all-time high. And more broadly, on M&A, he said: "Fundamentally as Kiwis, we are good at tech. But we also have to acknowledge that we're a small country, And when our tech companies are successful, we also have to be cognisant that they need to go global. And when they go global, we should celebrate that and not lament that we lost another New Zealand company."
"The perception of offshore M&A as a bad thing couldn't be further from the truth," says Clare Capital partner Mark Clare Photo / File
And Mark Clare told the Herald this morning, "We think M&A is a sign of a healthy local market. Sales bring offshore money and experience into NZ and give entrepreneurs the confidence to go to the next level. For example, Rod Drury selling Aftermail to Quest then going on to found Xero (read more on Drury's reinvestment here).
"The perception of offshore M&A as a bad thing couldn't be further from the truth.
"It shows offshore professional investors, VC and private equity funds are recognising the quality and expertise of New Zealand SaaS entrepreneurs."
What's next?
"The current level of M&A activity is continuing - and we don't see any slowdown in the near-term," Clare said.
"That is both domestic and international acquirers. Heck, you guys even brought Pattrick yesterday," he added, in a reference to Herald publisher NZME entering a deal to buy the Pattrick Smellie co-founded BusinessDesk for up to $5m.
Clare said other notable recent deals included Kiwi Wealth selling Hatch (which has 130,000 using its share trading platform) to multinational fintech FNZ for an undisclosed sum in October; the sale of Homes.co.nz to Trade Me (also for an undisclosed sum), and the sale of NZ gig economy pioneer StarNow (founded by three Trade Me alumni to cater to social media influencers) to a New York-based rival in a deal said to be in the tens of millions.
Expect the flurry of deals to continue.
"There is a lot of capital out there - and big players are looking to make strategic moves," Clare said.
"We have not seen anything specific, but would not be surprised to see one of the larger NZ tech companies - potentially listed - become a target of a large offshore strategic acquirer."
