Tech is booming and the deal landscape is rapidly evolving. What are the key tech M&A trends that investors, corporates and advisers should zero in on?
In this podcast, hosts Malika Chandrasegaran, Partner and Mia Harrison-Kelf, Senior Associate in the Sydney Corporate team explore the who, the what and the why of technology transactions across the Asia Pacific region. Every episode, Malika and Mia are joined by special guests to discuss a range of different issues involved in tech deals including data, privacy, cyber security, venture capital, the changing regulatory landscape, and more.
Episode 4: Top tax issues in tech deals
Join hosts Malika Chandrasegaran, Partner and Mia Harrison Kelf, Senior Associate from our Sydney Corporate M&A team for a discussion with Toby Eggleston, Partner and tax expert from our Melbourne office, on navigating tax related issues that arise when negotiating tech deals. They cover what regulators, such as FIRB and the ATO, are thinking about at the moment, issues such as scrip for scrip rollover, earnouts, retention payments and option schemes, and ways that we are bridging value gaps on tech deals in current markets.
Read our key takeaways
- The ATO is increasingly getting involved in FIRB approval processes and how parties are structuring acquisitions and consideration paid, in particular looking at thin capitalisation, transfer pricing and moving intangible assets offshore.
- Movement of intangible assets, such as IP, offshore to lower tax jurisdictions should have a commercial rationale and be done at an arm’s length price. New rules regarding deductions for royalties could potentially lead to double taxation so careful thought should be given to these arrangements.
- Scrip for scrip rollover relief can be valuable as it allows sellers who receive shares (rather than cash) as consideration for a sale to defer the taxing point to when they sell those shares down the line. However, there are various requirements that have to be complied with, including a requirement that the offer to selling shareholders be on substantially the same terms. This can create more complex consideration structures for tech companies where early stage investors are looking for a cash exit but other shareholders (such as management) want scrip and the ATO is increasing its focus on these arrangements.
- Earn outs can be a useful mechanism to bridge value gaps for tech companies and tech assets, particularly in a fluctuating market. Taxation of earn-outs can be relatively complex and have historically been taxed at market value, which led to interesting dynamics in the way the seller positioned the value of the business and the earn out. More recent changes mean that, if certain requirements are met, earn outs are taxed as if they were part of the original sale consideration and sellers amend their historical tax returns to reflect the additional earn out payment.
- Where earn outs are tied in part to ongoing employment, they can be taxed as employment income, rather than capital gain from the sale of the business. This can be relevant as Australia’s tax regime provides for a 50% discount (for tax purposes) on capital gains for assets held over 12 months so it is important to consider the relevant structure and implications of specific earn out conditions.
- Start-up companies often rely on employee share options as part of incentive packages and there are favourable tax concessions that can apply for these employees. There are some technical ATO requirements that have to be complied with to maintain the benefit of these concessions in a sale process, which are not difficult but need to be captured in the list of various transaction items (and best to get done early to maximise employee certainty around the transaction).
- An area of focus for tax warranties in tech transactions is R&D tax offset arrangements, particularly given a lack of clarity regarding scope of eligibility for software development and increasing ATO focus on the R&D offsets, which could result in refunds for ineligible claims.
Episode 3: Joint Ventures, alliances and other strategic collaborations
From contractual to incorporated joint ventures, data sharing arrangements and everything in between, the structures and complexity of tech deals are less likely to follow the traditional M&A or investment path which makes tech an exciting space to be working in. Join our host Mia Harrison-Kelf, Senior Associate in the Sydney Corporate M&A team, for a discussion with Peter Jones, Sydney Telecommunications, Media & Technology Partner, and Jamie McLaren, Corporate M&A Partner based in our Singapore office as they touch on the trends they are seeing across the APAC region and the drivers behind companies seeking out alternative structures.
Read our key takeaways
- Joint ventures, alliances and other strategic collaborations are becoming popular alternatives to typical M&A structures in many technology deals across the APAC region. Players in the tech space are increasingly seeing value in the use of flexible corporate structures that can be instrumental in ‘unleashing some of the momentum’ that is currently stored in the rapidly evolving tech sector.
- There are many advantages to the use of joint ventures in this context, including the chance for parties to ‘try before they buy’ before committing to significant equity investments. Alternative structures also provide the platform for companies – from large, established investors to emerging start-ups - to harness the opportunity around tech innovation without necessarily putting the ‘mothership at risk in terms of historical value of assets’.
- These structures typically involve one or both of the joint venture parties receiving or providing assets or services to the joint venture, such as partnerships between a challenger brand that has interesting IP or an innovative business model and a larger or incumbent organisation that has the data and infrastructure to leverage these assets. Valuation of assets or services contributed is key, as well agreeing up front the consequences of defaults in these contributions.
- While incorporated joint ventures are very common in the tech space, unincorporated joint ventures can provide more flexibility from a contractual prospective. Parties can collaborate in one jurisdiction, while retaining ownership over potentially valuable IP and the flexibility to explore opportunities in other jurisdictions.
- There are a range of potential challenges in joint ventures, alliances and other strategic collaborations in the tech space that need to be addressed early in the arrangement to align expectations of both parties and ensure a successful collaboration, particularly given parties often have different strategic goals, timelines and levels of organisational complexity.
Episode 2: Key regional trends in tech deals across APAC
Southeast Asia is said to be one of the fastest growing and one of the most active regions for tech deals in the world, so in this episode we’ll be taking a whistle stop tour around the region to talk about some of the key recent trends in tech transactions. Join our host, Malika Chandrasegaran, Corporate M&A Partner, with special guests Vik Tang, Partner and Head of Corporate in our associated Indonesian law firm Hiswara Bunjamin & Tandjung, and Victor Chiew, Director at our associated Singapore law firm Prolegis, as they discuss digital infrastructure, an increase in M&A deals and cloud hosting, tech companies acquiring banks in Indonesia, and how regulators are keeping up with the changing landscape.
Read our key takeaways
- There are lots of interesting and exciting tech deals going on in Australia and Southeast Asia right now. There has especially been an M&A and joint venture focus on digital infrastructure, including subsea cables, data centres, and towers. This demand has been driven by the booming digital economy and the need to prepare for the next wave of consumer tech including augmented reality and increased cloud services.
- Digital banks are becoming increasing common across the region. In Indonesia, FinTech firms have been acquiring then converting existing small banks into digital banks; in Singapore, the country’s first entirely digital bank, GSX, just launched; Malaysia has granted 5 digital bank licenses; and Thailand is exploring creating a regime to license digital banks.
- Regulators and governments have been generally supportive of e-commerce and foreign investment. There’s been an growing focus on crypto-regulation, personal data protection and preserving national security interests.
- Changes to valuations in the current climate of rising interest rates and heightened volatility could drive bidder activity and change once standard business practices. For example in Australia equity value softness may lead to more interest in tech-enabled growth and increasing business’ tech capability. In Indonesia, despite conventional wisdom to the contrary, tech unicorns are starting to prefer domestic listings and use fewer offshore holding companies, given the uncertainty of overseas markets.
- Overall, it’s an exciting time to be doing tech deals in Southeast Asia!
Episode 1: Welcome – the who, the what and the why of tech deals across APAC
Join Malika Chandrasegaran, Partner and Mia Harrison-Kelf, Senior Associate as they kick off our new podcast series which will explore the who, the what, and the why of tech deals across the Asia-Pacific region.