It's tech's time to shine on the ASX, proving the short sellers wrong
There was a time, not that long ago, when billion-dollar takeovers of Australian companies by foreign corporate giants caused anguish.
The purchase of biscuit maker Arnott’s by America’s Campbell’s Soup, the Singapore stock exchange’s attempt to buy the ASX, and cereal giant Archer Daniels Midland’s bid for Graincorp, are just some examples of contentious foreign takeovers that caused much hand-wringing over the years.
Now, I’m definitly not suggesting that the economic nationalism of years gone by is something we should miss – but it was in striking contrast to how the latest big foreign takeover was received this week.
Aconex, a relatively obscure construction software company from Melbourne, is far from a household name, but when it announced an agreement to be acquired by US software colossus Oracle for $1.6 billion, the reaction was positively jubilant.
Particularly within the closely knit tech sector. And that jubilation is totally understandable.
Aconex had been on a remarkable, and often uncertain, 17-year journey. Its founders will each walk away with a cool $100 million, some of which might well flow back into promising tech companies of the future.
Rather than any regret over a key member of a nascent industry being “lost” to another country, there was a strong sense of vindication.
A member of the Silicon Valley elite (which, it must be said, has its own issues at the moment) wants to acquire a firm that had been seriously doubted by sections of Australia’s investment landscape.
In truth, there was some anguish about this deal, but of a different kind.
It was interpreted by many as another sign that Australia’s big fund managers just don’t understand tech stocks.
Ahead of the deal, Aconex was among the most heavily shorted stocks in the Australian market – which means quite a few investors were aggressively betting that its share price would fall.
The Oracle acquisition, at a hefty premium, would have been extremely painful for them.
There’s a problem with this narrative though.
A big part of the thesis behind shorting Aconex was that its shares were overvalued.
And the reason its shares looked overvalued (to the shortsellers) was because other (Australian) investors were prepared to buy the stock, bidding up its price.
Even before the takeover bid was announced, the bulls were in control: Aconex shares had nearly trebled in value since the company’s sharemarket float.
Evidently, many local investors did in fact understand its potential, and are set to profit handsomely from that.
Short selling is a fact of life in the modern markets (arguably, it is a good thing) and short selling of tech stocks is certainly not unusual.
Some of the biggest names in US tech – think Netflix, Amazon – have incurred the wrath of the shorts over the years.
Tesla, one of the most talked-about companies on the planet, is consistently among the most heavily shorted names in the US.
Since tech companies often forgo short-term profits for growth, their ability to make money, and long-term prospects more broadly, are often heavily debated.
Sometimes the short sellers get it right. Often, they get it wrong.
But their existence doesn’t imply much beyond the fact that it’s harder to make money punting stocks than it once was.
The Aconex deal tells us a lot about tech’s growing role in Australian business.
The business establishment in Australia has long been dominated by mining, finance and domestic oligopolies.
There is an outsider mentality within the tech and startup sectors, but as tech begins to infiltrate everything, those days are numbered.
It is true that tech stocks remain woefully under-represented on the ASX (and that this explains some of our sharemarket’s relative underperformance).
Tech accounts for about 1 per cent of the ASX/200 index, compared to 20 per cent of Wall Street’s S&P 500 benchmark index.
But tech is a significant part of the actual economy. It accounts for around 5 per cent of GDP, and around a fifth of all jobs, depending on how you measure them (every company has an IT department, and a tech stack).
The performance of ASX-listed WiseTech – a $4 billion company now, and the third best performer on the ASX/200 this year – offers a sign that attitudes among local investors towards tech are in fact changing.
This, together with Atlassian’s stunning performance on the Nasdaq and the Aconex buyout show that momentum behind the sector is real.
And with heightened interest in entrepreneurship and record levels of venture capital funding, all signs point to it continuing.