Opportunities for M&A on i-Tech Companies

By Charmaine Rose K. Haw-Lim & Mari Janine Evan D. Mesina

Posted: 13th June 2016 08:10

A number of mergers and acquisitions in the information technology (“i-Tech”) industry have been concluded in recent times. Just last year, Dell Inc. signed a $67-billion deal to acquire EMC Corporation, which was a deal that affected the Philippines as well since EMC has had presence in the Philippines for several years now.
 
i-Tech companies, whose products and services are gaining relevance and popularity in the Philippines, are growing in numbers. Aside from the Philippines being tagged as the “Social Media Capital of the World,” a lot of i-Tech-related products, mostly anchored on social media, have been emerging. For instance, in the recently concluded general elections in the Philippines, digital market research gained so much popularity. Digital market research firms were tapped to conduct “pulses” throughout social media to determine the reception of certain candidates by the Filipino population. Moreover, companies have generally been employing the services of digital market research firms in its brand launching, to determine the sentiments of consumers in favour of or against a particular brand or product being offered to the public.
 
On the legal side of things, the recent trend in laws enacted by Congress and decisions promulgated by the Supreme Court also show a shift towards recognition of the need to protect i-Tech-related matters. For instance, in 2011, the Data Privacy Act was enacted, which established parameters when the processing of personal information collected electronically or otherwise are allowed. Also, in 2012, the Cybercrime Prevention Act of 2012 was enacted, aiming to define and penalise crimes that may be committed through an online platform.
 
A number of i-Tech-related bills are also pending in the Philippine legislature, including bills providing for a Magna Carta for internet users, for free public Wi-Fi throughout the country, and for the creation of a Department for Information and Communications Technology, all of which will promote the growth of the i-Tech industry in the country.
 
Just recently, the Supreme Court upheld the right of an internet-based company, Rappler, to live stream the Presidential and Vice-Presidential debates, subject of course to the rules on copyright that the source be properly indicated. In upholding Rappler’s right to stream the debates, the Philippine Supreme Court reasoned that on account of the national interest aspect of the then upcoming general elections, there is a need for the “widest possible dissemination of the debates (Rappler, Inc. v. Bautista, G.R. No. 222702, 5 April 2016).” Through this decision, the Supreme Court recognised that streaming through an internet-based media, such as Rappler, would ensure that the Presidential and Vice-Presidential debates – an event that is very important to the Filipino nation – will reach the widest possible audience.
 
Given these developments in the i-Tech industry, it will not be a surprise if there will be an increase in demand for i-Tech products and services, as well as growth in the i-Tech industry. In fact, according to International Data Corporation, it is forecasted that the i-Tech spending in the Philippines will increase by about 8% to around $7.1 billion this year, as a result of increased spending in data storage, as well as for the security of data.[1] Inasmuch as a number of i-Tech companies are small- and medium-sized companies looking to expand, most of them are looking at considering mergers or acquisitions, whether local or cross-border, for a possible avenue of expansion to keep up with the challenges of a highly competitive business industry.
 
In addition, with the ongoing move for ASEAN integration, geared towards achieving an ASEAN Economic Community, more mergers and acquisitions are expected in order to keep up with the demands of the integration. Considering that the i-Tech industry in the Philippines has so much potential for expansion, mergers and acquisition in this industry will likely increase as well.
 
In entering into a merger and acquisition transaction of i-Tech companies, aside from the usual considerations in conducting due diligence, a number i-Tech company-related issues have to be taken into consideration as well. These issues include the peculiar valuation of cyber assets such as programs or software technology, mobile or similar apps, Internet address or domain names, and customer list and data, etc. These cyber assets, being developed online, are all intangibles that would generally include goodwill of the business or of the product.
 
Also, industry-specific laws and regulations have to be considered. In the Philippines, for example, possible exposure to the Data Privacy Act, Cybercrime Law and other related laws are additional lookouts for mergers and acquisition deals.
 
Furthermore, in addition to the existing regulatory requirement in the Philippines for mergers and acquisition transactions, the new requirements for such transactions under the recently enacted Philippine Competition Act must also be taken into account. Though not specifically confined to i-Tech companies alone, such new law and related regulations could also affect mergers and acquisitions involving i-Tech companies. Under this law, mergers and acquisition transactions entered into shall now be subject to the review of the recently established Philippine Competition Commission (“PCC”), which may prohibit the implementation of a merger or acquisition agreement that is deemed to be anti-competitive. In addition, those merger and acquisition transactions whose value breaches the one billion Peso (PhP1,000,000,000.00) threshold are required to notify the PCC and provide certain information about the transaction before the parties may implement the transaction. Failure to notify the PCC of mergers and acquisition transactions falling within the threshold can affect the validity of the transaction, and even result to significant fines. Under the Philippine Competition Act, the implementation or consummation of the agreement in violation of the notification requirement shall be considered void, and shall subject the parties to a fine ranging from 1% to 5% of the value of the transaction (Philippine Competition Act, sec. 17). The review of mergers and acquisition transactions and the requirement for compulsory notice to the PCC shall not only apply to transactions entered into the Philippines, but also to those executed internationally which have “direct, substantial, and reasonably foreseeable effects in trade, industry, or commerce in the Republic of the Philippines (Philippine Competition Act, Republic Act No. 10667, sec. 3).” As of the writing of this article, the PCC has yet to issue the implementing rules and regulations of the Philippine Competition Act. In the interim, however, the PCC released Memorandum Circular No. 16-001, which shall cover mergers and acquisitions executed or implemented after the effectivity of the Philippine Competition Act but before the effectivity of its implementing rules and regulations.
 
Given the indications of possible growth and need for expansion in the i-Tech industry, a lot of opportunities are available for investment and/or mergers in companies belonging to that industry. In advising on these possible mergers and acquisition deals, regulations and other issues peculiar to the i-Tech industry also have to be given importance, for seamless post-deal integration and so that these opportunities for expansion and growth will not be put to waste.
 
Charmaine Rose K. Haw-Lim is part of the corporate and litigation group of Gulapa Law Office. Her areas of practice include general corporate, franchising, infrastructure, litigation and arbitration and intellectual property. She is currently a supervising lawyer of the associates at Gulapa Law Office. She received her law degree from Ateneo de Manila University – School of Law with Second Honors and was admitted to the Philippine Bar in 2011.

Charmaine can be contacted on +6325779499 or by email at aris.gulapa@gulapalaw.com
 
Mari Janine Evan D. Mesina is a certified public accountant and has a broad practice that includes corporate and M&A matters, i-Tech related matters, and other areas of practice with financial and tax-related concerns. She graduated with a degree in Accountancy (Honorable Mention) in 2010 and passed the licensure examinations for Certified Public Accountants in the Philippines in the same year. In 2014, she earned her Juris Doctor degree with Second Honors, ranking fifth in her class. She was admitted to the Philippine Bar in 2015.
               
Mari can be contacted on +6325779499 or by email at aris.gulapa@gulapalaw.com

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