Small and medium-sized enterprises are increasingly targeted in their acquisition strategies but they continue to trail their larger counterparts when it comes to investing in startups to leverage their disruptive technologies.

“We’ve noticed this shift in the last three years,” says Vikram Chakravarty, EY Asean transaction advisory services leader. “Ten years ago, we didn’t think SMEs were really active in (pursuing) aggressive growth in any direction. Historically, M&As were very patchy and peripheral … That has changed. SMEs are now far more focused and the conversation has changed.”

According to EY’s Global Capital Confidence Barometer which was released earlier this year, 41 per cent of SMEs in Southeast Asia said they are looking to actively pursue M&As over the next 12 months.

This shift in attitude is partly brought about by global trends and greater awareness as younger second- or even third-generation leaders step up says Choo Eng Chuan, EY Asean Growth Markets Leader.

Yet, SMEs continue to be reluctant to acquire within the new economy space.

Jonathan Ho, head of enterprise market at KPMG in Singapore, suggests that since most SMEs in Singapore are traditional brick-and-mortar businesses that are business-facing, they have not really explored new digital economy offerings.

“I think they will more likely outsource at the start than acquire. Their focus is on expanding markets and efficiency improvement within the organisation,” says Mr Ho.

Ling Tok Hong, mergers and acquisitions leader at PwC Singapore notes that SMEs in general are not that active in mergers and acquisitions, preferring to do “greenfield” deals, by entering partnerships or even send a representative to set up a field office and hire locally in their target market.

EY’s Mr Choo on the other hand posits that most SMEs steer away from new economy acquisitions because of the perceived valuation gap.

He explains: “Let’s say we have a fintech making half a million or so and you have a brick-and-mortar leasing business which has a $250 million loan book servicing the SME market, making $2 million in net profit. The fintech is valued at $500 million. This traditional lending business, making $2 million, is valued at $28 million.”

But even if the business has the war chest required to fund an acquisition, are they able to stomach the volatility of a startup environment?

PwC’s Mr Ling says: “A lot of startups burn cash for a few years without any guarantee of success and it may take them a longer run to survive the burn and keep up with the changes in the fast-changing startup environment. It’s not easy for SMEs to fund this.”

EY’s Mr Chakravarty maintains it is “a matter of time”.

“The heavy industrial businesses will try to get to the services through either direct new economy acquisitions or service acquisitions. We think that will be the next wave of development for these companies.”