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How capital-palooza hit Australia's tech scene

How capital-palooza hit Australia's tech scene

At least 30 companies have taken advange of recent regulatory easing on capital fundraising — but just how can they take advantage of the opportunity?

In the three months since the coronavirus pandemic sent Australia’s economy into freefall, the country's biggest tech giants are going singing to the bank.

Due to emergency measures by Australia’s financial powers, publicly listed players have been able to pull in millions of dollars of fresh investment in what has been a palooza of capital raisings.

Although the scheme has led to fears of equity dilution, the scheme has helped keep the wheels running on what could potentially be the local tech scene’s darkest period.

“The technology sector has long been seen as both attractive and risky, with perceived lofty valuations and volatility sitting alongside rapid growth,” explained Colin McNeil, EY partner, M&A.

“The impact of COVID-19 has caused volatility across all sectors, and in fact technology stocks have weathered the storm reasonably well, as the last month has seen share prices recover losses faster than the wider ASX [Australian Securities Exchange] trend.”

According to EY, 30 companies that provide IT, software, cyber security, artificial intelligence, telecommunications, as well as niches in financial and health tech, have taken advantage of the regulatory easing. So just what are these new measures?

Launched by the Australian Securities and Investments Commission (ASIC) and the ASX on 31 March, the scheme allows issuers to selectively issue 25 per cent of new shares (previously 15 per cent) provided that they make an entitlement offer as a follow-on to the placement at the same or lower price. 

At the time of writing, the regime was scheduled to expire on 31 July 2020 unless the ASX chooses to remove or extend the relief.

Among those quick to take advantage of the relief was NextDC, which is pursuing $672 million, half of which to use for its upcoming new data centre S3 and has so far raised $190 million.

Meanwhile, tech distributors Dicker Data and Rhipe have secured $55 million and $34 million respectively, the former to aid building its new warehouse and the latter to pursue acquisitions.

Others raising smaller amounts included Spirit Telecom, which sought $9.2m for acquisitions; Data Exchange Network (DXN), which raised $5.9 million to fund Hobart Data Centre and NetLinkz, which launched a bid for $4.5 million to expand its footprint in Beijing. 

John Grant-backed cyber security company FirstWave also launched a bid for $14.9 million for the slightly vague ambitions of “realis[ing] its opportunity to be a leading cyber security partner to Telcos and managed security service providers world-wide “. 

For McNeil, businesses that help facilitate the post-COVID-19 ‘new normal’ and “support the economic recovery” of both small firms and enterprises will be the most successful at drawing investor funding. In particular, those offering B2B cloud solutions will attract most notice, reflecting a recent report by IDC that showed the resilience of cloud service providers in the wake of an IT spending crunch. 

As Bridget Soul, business director at Day Tek Capital, stressed “there’s a lot of “money to be made in tech”, and in today’s climate fortune is favouring “the less glamorous” side of the industry instead of supposedly trendy businesses like those selling blockchain solutions. 

“Investors are however more likely to invest in artificial intelligence and cloud platforms, partly due to the fact that they reduce operating costs for most businesses, are actionable and provide real-time information to multiple business units and teams within an organisation,” she explained.

However, she added: “Identifying the perfect combination of evolving digital technologies to create value for investors isn’t easy. Getting both top-line and bottom-line-growth from investor’s technology investments is increasingly becoming more difficult.”

To keep up the momentum and continue drawing in investors, Deloitte partner of TMT M&A Advisory Kat McMaster believes now is a good time for tech players to consider streamlining their operations.

“Even tech businesses which regard themselves as lean are looking at where they can streamline their business to minimise cash burn and position themselves well,” she said. “If they do need to raise capital they need to ensure it is enough to see them through this downturn, as markets are likely to be sceptical if tech companies need to go for a second raise in the short term.”

Meanwhile, this may also be a good time for smaller tech businesses to consider partnering with corporates, she added, saying: “Some progressive corporates are using this time to consider the impact of digital disruption now and in the future and review what is the most sustainable business model going forward.”

One notable standout sector in the digital disruption space is the unified communications space, which has seen a tremendous upheaval on the back of coronavirus-induced home working. 

A recent report claimed that usage of Zoom, Cisco Webex, Microsoft Teams and Slack had collectively soared by 630 per cent over the past three months. 

Soul also echoed McMaster's sentiments, saying: “To help keep up the attention, a tech company needs to continually digitally reinvent their operating models and deliver top tier industry customer experiences. Firms need to do this while being able to operate and evolve efficiently and to scale. Combining these elements will hopefully lead to business profitably for both the founders and investors.”

For the majority of businesses that have successfully carried out fundraising and share placements, the top priority will be preserving cash flow and and reducing debt provision, believes McNeil. 

Given the uncertainty that coronavirus has created across Australia, and the subsequent cancellation or postponement of many IT projects, this isn’t an unsurprising assessment. 

“Businesses should be investing in both product and marketing, but with COVID-19 having significant impacts across sectors, companies must refine and adjust their ‘product-market fit’,” he explained.

However, there is opportunity to be ambitious with acquisitions, as looks to be the case with Rhipe and Spirit Telecom. 

“The markets are still excited by M&A and new product innovation. Whilst the current situation makes global expansion difficult, businesses must be well prepared to attack lucrative markets outside of Australia,” McNeil explained. 

“For the more aggressive businesses, now can certainly be a time to act on opportunistic M&A activity – although we do not anticipate technology owners to be willing to sell at a discount.”

 


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