US-China tensions worry tech investors - M&A Forum

Karen Zhang, head of China emerging technology investments at KKR, told the Mergermarket Asia M&A Forum that innovative companies often present challenges to regulators of industries they disrupt and it “takes time for governments to understand how to position and set up regulatory frameworks.”

She observed that the Chinese government already went through this process with social media-based short video platforms in response to the rise of ByteDance, operator of Douyin within China and TikTok internationally. There are now several domestic rivals to the platform, including Kuaishou, which has received substantial PE and VC backing.

“Technology is increasingly making the global market one flat market where you can understand consumer behavior and business models,” Zhang added. “There is no way for anyone to stop this trend because it brings so much efficiency to the market and consumers like it so much.”

KKR is an investor in ByteDance, which has been ordered to sell off TikTok’s US-based operations or see the app banned. Microsoft Corporation is in discussions over a potential acquisition of the business. TikTok was already under review by the Committee on Foreign Investment in the US (CFIUS) regarding concerns that China could use the app to access sensitive data. The company claims that US user data is stored locally and there are strict controls on employee access.

Two weeks ago, President Donald Trump issued executive orders that bar any transactions with TikTok and with the Tencent Holdings-owned WeChat platform by any person or involving any property subject to the jurisdiction of the US. The orders were due to come into effect after 45 days, which effectively sets a deadline for any TikTok-Microsoft deal. The implications for WeChat are uncertain, although Tencent said the ban would only impact its US operations.

Zhang noted that regulatory risk always forms part of KKR’s risk assessment criteria. It is especially pertinent for investments in technology companies that look to introduce new business models and inevitably attract government attention.

Deteriorating relations between China and the US also pose a threat to the status of Chinese businesses listed on NASDAQ and the New York Stock Exchange. Policymakers have said that companies unable to comply with local accounting regulations may have to vacate these exchanges. The State Department reportedly told university endowments this week that it would be prudent to divest their interests in Chinese companies because of potential wholesale delisting.

“The good news for Chinese technology companies is they have more options. They can go to Hong Kong or the Shanghai tech board, and now the Shenzhen SME board has new regulations to encourage technology companies without profit to list,” said Mingming Huang, a founding partner at Future Capital Discovery Fund.

However, he stressed that the best companies will still want to list in the best capital markets – and for many that will be the US with its strong regulation, high levels of liquidity, and global investor base that understands technology. Huang added that investors will try to pursue quality almost regardless of government restrictions. “Investors will be more cautious, but the best companies will always stand out,” he said.

Avaya, a US-listed IT services company, is among those taking a cautious approach. Pritimukta Sarangi, a Singapore-based senior director for corporate strategy, noted that China presents a significant challenge right now. “There is this regulatory hurdle we are being asked to cross,” she said. “In the current environment, we would take a step back and watch how this develops.”

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• Topics
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