Choosing the right path for capital raising is crucial for any company’s growth and long-term success.
M&A vs IPO
To be successful in an IPO, a company must meet stringent quantitative and qualitative requirements to be listed on the stock market. IPOs are more suitable for companies expected to grow significantly from a macroeconomic and long-term perspective.
Mark Zuckerberg, the founder of Meta, mentioned that he has thought about M&A almost daily since starting the company. Ultimately, he chose an IPO because of the long-term management perspective and investor expectations, considering the transition from the existing Facebook social media platform business to the Metaverse market.
On the other hand, M&A is a good exit strategy for deep-tech or tech-based ICT service companies and trend-sensitive B2C consumer goods companies. For example, the emergence of generative AI, such as Apple’s smartphones and OpenAI’s ChatGPT, has created a new market that has never existed and exploded in growth. In this rapidly changing environment, M&A is not just a strategic option but a necessity for companies that want to launch new businesses and preempt the market quickly.
Korean startups making waves: Success stories
The first case is ‘Stylenanda,’ acquired by global cosmetics company L’Oréal. The company initially sourced clothing from the Dongdaemun market, a famous fashion market in Seoul, South Korea, and sold it online.
Then, it grew into a full-fledged business through its platform. Although it started with clothing, it expanded its business to various categories such as cosmetics, beauty contact lenses, and fashion and beauty books. It is best known for selling its beauty brand 3CE to L’Oréal for US$416 million.
The second company is the Woowa Brothers, which runs a delivery service platform called ‘Baedal Minjok.’ A German company, Delivery Hero, has been aggressively acquiring delivery platform companies for ten years, and the Korean “Woowa Brothers” were eventually acquired by Delivery Hero for US$4 billion.
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Third, ‘Have & Be,’ famous for its Dr. Jart+ skincare brand, continuously contacted and succeeded in entering the US cosmetics multi-shop called ‘Sephora’ with every new product release. After promoting the company and reaching a US$1.7 billion enterprise value, they signed an M&A contract with Estée Lauder. Estée Lauder initially acquired 30 per cent of the shares and later acquired 70 per cent in the form of earnout (a method of purchasing additional shares based on business performance after acquisition).
Enhancing capital market communication for successful investment and cross-border M&A
Beyond practical and detailed preparation, companies should put significant effort into communicating with the capital market. Startups often raise investment in stages, from seed investment to Pre-A, Series A to Series C-D. In this process, it is essential to actively communicate with the capital market, i.e., investors, from the very beginning of the company’s operation to share its technology and business model.
Additionally, for cross-border M&A with overseas global companies, it can be beneficial to participate in startup and technology exhibitions related to your field, such as CES, SWSX, and MWC, to promote your company to global investors and global conglomerates. Participating in these exhibitions increases communication with overseas companies and promotes the company through media outreach, investing more effectively.
Navigating diverse M&A practices: Harmony, flexibility, and metrics
Starting with Japan, it tends to be very cautious regarding M&A. One of the most essential concepts in Japanese culture is the word “和” (harmony). Japanese companies prioritise business relationships over equity and post-merger returns, so M&A is often considered only after the collaboration phase. Large equity transactions involving a change of control are rare in Japan.
In China, it’s not impossible to sell and buy companies’ tangible and intangible assets. Still, the government owns these assets, so sudden changes or sanctions may occur depending on the government’s political direction.
Chinese companies often view contractual terms and conditions as flexible items rather than obligations at any time. Private equity firms in Hong Kong and Singapore usually handle M&A deals on behalf of the acquiring company, successfully closing the deal by completing the conditions.
The M&A process in the US is relatively straightforward due to the long history of capital markets. As the phrase “Money talks” describes the U.S. capital market, both sides focus on “money” numbers, such as the percentage of equity, the purchase price, and estimates of future profits after the acquisition. If you want to make a deal with investors or companies in the US, you need to focus on objective numbers and metrics to close the deal.
Understanding earnouts: A key strategy in US and European M&As
One essential concept to familiarise yourself with when conducting M&A with U.S. and European companies is ‘Earnout.’ For example, in the case of the beauty company Have & Be, Estée Lauder acquired only 30 per cent of the company.
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After observing the company’s operations and seeing that it met its revenue growth targets, Estée Lauder bought more shares. Eventually, Estée Lauder acquired 70 per cent of the company, including the shares held by Haveandbe’s majority shareholders, making the M&A possible.
The same was true for Woowa Brothers, acquired by the German company Delivery Hero. Delivery Hero initially purchased only the shares of financial investors, such as venture capitalists. They later purchased additional shares of Chairman Bongjin Kim through the earnout method. The earnout method is standard in global M&As in the Americas and Europe, so it’s worth knowing in advance.
Leveraging M&A strategies for sustained growth and global expansion
Companies like GE, Google(Alphabet Inc.), Microsoft, and Apple have grown into the companies they are today through M&A strategies, and they continue to run global businesses in new fields. In the past, companies used to take a greenfield approach to growth by investing their own CAPEX, building factories, hiring people, and growing their businesses individually. However, companies develop through various M&As, such as joint ventures, selling their own companies, spin-offs, and M&As with other companies.
Considering various M&As more actively can be a significant driving force for company perpetuation and growth and a breakthrough for global corporate growth, even in the current challenging capital market.
Special thanks to Chester Cheol Joong Kim, the Founder and Managing Partner of SU&Partners, Korea’s top-tier cross-border M&A Advisory and CEO of SU&Financial Investment,’ for his valuable contributions to this article.
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is a bit crowded but there’s still space for you. Just make some space for AI founders that missed the 2023 bandwagon — we’ll pick them up in a bit.
