Sources inform ''Globes'' that Infinity and its Chinese partner China Singapore Suzohu Industrial Park Ventures have invested a total of $73 million in Digital IT Services (DCITS), the service division of Digital China, which will be spun-off as an independent company. Infinity will invest $15 million and lead the deal.
DCITS is the sister company of computer maker Lenovo. The two companies belonged to the Legend Group, with Lenovo responsible for production while Digital China served as the group's sales arm.
The investment in DCITS will enable Infinity and its partners to turn the company, which sells to the Chinese market, into a platform for marketing and selling the IT products and services of Israeli technology companies.
One of the common problems faced by start-ups targeting new markets is the difficulty in reaching major customers. Infinity believes that the strong DCITS brand will represent a quantum leap in the exposure of Israeli technology products to the Chinese market.
Since it was founded, DCITS has progressed from sales division to one of China's IT services providers. It provides a range of services to large customers, including system integration, software development, maintenance, outsourcing, and consulting and training. The company has a 9,000-strong network of agents and sales personnel across China.
Infinity will make the investment from its I-China fund, which has raised $300 million to date. I-China is a not a venture capital fund, but a private equity fund which invests in mature companies and aims to hold substantial stakes in them.
I-China's purpose is to serve as a bridge between business interests in Israel and China. The fund focuses on locating Israeli technology companies and tailoring their technology to the needs of the Chinese market.
DCITS appears to fit Infinity's investment criteria, since its customers include government institutions, as well as telecoms and financial companies. Sources close to the deal point out that the restructuring now underway, in which DCITS is effectively being spun out of China Digital and turned into a private company, reflects the change now taking place in the Chinese market as it makes the transition from selling hardware to offering software and service solutions.
Infinity managing partner Avishai Silvershatz said, "DCITS is the largest and most prominent company in which the Infinity I-China Fund has ever invested, and Digital China is the strongest domestic brand in China’s IT industry. Its market presence within major accounts in government and industry, execution capabilities, strategy as well as an unrivaled management team, all put DC and its spin-off in a clear leadership position."
Globes: How important is this investment for Infinity?
Silvershatz:"The deal represents an important milestone in the implementation of Infinity's strategy of investing in leading Chinese companies that can help Israeli companies and others enter the Chinese market. The new investment has created a natural partner in China for Israeli IT companies."
Silvershatz added, "This investment is the kind of special deal that many foreign investors look for in China, and which the Chinese usually don't allow. In China, preference is given to local money. There was competition between leading Western investors over the investment in DCITS, and we beat out well-known names from the West, both because of the relationships we have in China, and DCITS' interest in Israeli technology."
Will the fact that the company is a leader in its field help Israeli companies?
"Brands in China are an enormously important issue, particularly in the government, financial, and telecommunications sectors. They will buy only from someone who is a strong brand that has proved he is someone they can work with. Digital China's founder is a much respected figure in China."
The next stage after spinning off DCITS is to float it in China. Digital China, which began life as Lenovo's distributor, did not offer much in the way of services. Profit margins in the distribution market are now low, whereas those on services are seeing continuing growth. The investment will enable the transfer of all Digital China's service businesses to the new company, which will generate higher value margins on them. It is a new company under the same brand.
Infinity manages a total of $600 million. Among the investors in the new I-China fund are IDB Holding Corp. Ltd. (TASE:IDBH), which invested $50 million; Leon Recanati's GlenRock Israel; China Development Bank, as well as investors from the US, Europe, and China, and founders of Israeli software companies. The new fund has made five investments so far, including the latest one in DCITS.
Headquartered in Beijing, Digital China has annual revenue of $4.5 billion. The company has three core lines of business - system integration, IT services, and IT product distribution.
Infinity's partner CSCV, which was founded in 2001, is a wholly owned subsidiary of Suzhou Venture Group focusing on semiconductor and micro-electronics, software, new materials, bio-tech and new energy industries with a portfolio of more than 45 companies.
Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2008
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