This article sets out the causes and features of current M&A trends in the technology, media and telecommunications (TMT) market, drawing from the authors’ experience as well as from news sources and specialised industry reports. As a conclusion, it also warns of possible implications.

Downward Trend in M&A Activity

While there has been a decline in recent M&A activity within the TMT sector, this is still expected to be an attractive area for investment and M&A in the medium and long term. The rise of digitalisation, particularly driven by emerging technologies such as artificial intelligence (AI) and the Internet of Things (IoT), is crucial for businesses to adapt and innovate in response to dynamic market conditions.

The recent reduction in tech valuations and global deal activity seems to be largely due to:

• high inflation;
• hikes in interest rates;
• fears of recession; and
• overall global economic uncertainty.

Current macroeconomic factors and trends have impacted on deals across sectors in different ways, though the TMT sector remains at the top of the M&A market. This is consistent with the authors’ own experience at Preiskel & Co. M&A activity is still being seen in the TMT sector, where the firm’s work covers both national and international transactions, often with no direct connection to the UK. 

TMT firms have also made prominent efforts to address climate change and promote sustainability. The deployment of low-Earth orbit (LEO) satellites persists, albeit with apprehensions about potential collisions. In higher orbits, radiation-resistant microchips are transforming the realm of space technology. Additionally, virtual production methods are becoming a key element both in contemporary blockbuster films and in the emerging concept of the metaverse, shaping the future of entertainment and digital experiences.

Current TMT M&A Market Trends

In the short term, TMT M&A has faced challenges similar to those affecting global deal making, such as:

• capital constraints;
• high interest rates;
• disrupted supply chains;
• high labour costs;
• geopolitical tensions; and
• regulatory scrutiny.

These factors have affected TMT deal volumes, deal structures and values in the first half of 2023, with expectations of a similar trend in the last quarter. However, the authors remain optimistic that current valuations will lead to deal opportunities in the near future. Adopting a bold M&A strategy in a volatile post-pandemic era is becoming more of a necessity, and the role of CEOs in steering their companies towards success has never been more challenging.

Smaller Deal Values

The prevailing higher-interest-rate environment has sparked a heightened importance on smaller-scale deals. The authors are seeing greater investor caution, with acquirers opting for more modest transactions.

Evolution of Deal Structures

The prevailing uncertainty concerning the cost and availability of capital, along with the broader macroeconomic outlook, is likely to prompt deal makers to exercise caution when determining valuations. Strategic buyers seeking advantageous deals should anticipate heightened competition from financial buyers as the year progresses.

Some buyers, particularly financial buyers, are seeking structural alternatives to upfront cash payments. The authors are increasingly seeing buyers offering equity consideration and cumbersome earn-out models, and proposing rollover structures. Founders may not see any immediate benefit in these structures, but they are more aligned with the buyers and are incentivised to ensure continued success post-completion of an M&A deal. 

Focus on ESG

Companies are expected to focus more on ESG in their M&A decisions, as there is a lot of “dry powder” targeting impact investments. This will drive M&A by financial sponsors in businesses with strong ESG credentials.

Prolonged Deal Timeframes

The authors are seeing M&A deals taking longer to complete than in the past, which is attributable to the cautious approach to risk management being taken by acquirers in the current market. Increased regulatory scrutiny has also enhanced execution risk and deal timelines.

Digital Transformation

Businesses are realising the need to digitalise or adopt technological solutions to keep pace in the current market. Whether they are acquiring or being acquired, having robust digital capabilities will be a strategic advantage.

Private Equity Dominance

Private equity sponsors, which often favour tech businesses, were keen to spend some of their built-up “dry powder” in the sector. The trend of private equity in the M&A landscape is poised to continue well into 2024 and is likely to persist, shaping the M&A landscape in the years to come.

Despite global challenges, such as capital limitations and geopolitical tensions affecting M&A across various sectors, the TMT sector is expected to reach healthier levels of deal activity in the medium to long term. There are opportunities for companies with robust financial positions to stand out by:

• investing strategically;
• enhancing their technical capabilities;
• fostering innovation; and
• driving transformation.

Companies facing capital constraints may nevertheless encounter more significant hurdles, and private equity firms are likely to continue to be drawn to the TMT sector, enticed by its high-margin business models and robust cash flows.

Continued M&A activity can lead to market consolidation, reducing the number of players in the TMT sector, which in turn can affect competition and potentially limit consumer choice. While M&A can bring resources and capabilities together, it can also inadvertently stifle innovation and creativity if not managed effectively. Integration challenges must accordingly be addressed to ensure continued development of cutting-edge technologies and content.

Economic and Regulatory Situation in the UK

According to a recent KPMG report, the UK economy is likely to avoid a recession due to several factors:

• better energy price prospects;
• a stronger global economic environment; and
• a tight labour market.

However, economic growth is expected to remain weak compared to historical standards; and on the downside, there are more risks.

Inflation is decreasing from its peak, but is doing so more slowly than what energy price movements suggest. Core inflation, services price inflation and wage growth are all indicating persistent pressure on prices.

Households and businesses have similarly been adjusting to higher prices and interest rates by reducing consumption and investment. Even though inflation is expected to continue falling in the short term, borrowing costs are likely to stay elevated for an extended period, which will dampen M&A activity.

On the regulatory front, the relatively recent introduction of the National Security and Investment Act requires that a notification be made and clearance obtained from the government before completion of certain deals, giving the government the power to scrutinise transactions for up to five years after completion. The Committee on Foreign Investment in the United States is also increasingly scrutinising certain transactions that relate to overseas investors, which adds to the work required to complete deals. Although the UK government’s intentions were made clear in order to not deter investments, it is still uncertain whether such increased scrutiny and delay will continue to reduce M&A activity in the UK.

M&A Outlook in Subsets of the Tech Sector

Due to continued interest in the adoption of new technologies, technology demand is expected to create M&A opportunities both in software and in infrastructure-enabling technologies such as 5G, the metaverse and associated technologies.

There continues to be increasing investment in ESG-related projects, as sustainability has recently become a key element of corporate strategy and culture. The focus on acquiring environmentally friendly and responsible assets has been brought about by positive returns in ESG-related stocks, private equity firms increasing their ESG efforts for portfolio diversification, and debt providers awarding better prices for participants in environment-related transactions.

Due to capital allocation being made available for M&A, owing to the need for scale, activity in the pharmaceutical and life sciences sector is also expected to continue throughout 2024.

Additionally, according to a recent study conducted by PwC, IT services (particularly in areas such as cybersecurity, DevOps and digital transformation) are experiencing strong growth due to digitalisation and increasing security risks. Cross-border M&A in cybersecurity is notable, with US tech companies seeking targets, particularly in Israel.

AI has gained significant attention as a transformative force, opening doors for productivity enhancements and market expansion. The emergence of AI models such as ChatGPT and GPT4 has showcased potential use cases. This increased prominence of AI is expected to drive future M&A activity across the technology sector.

Software, on the other hand, with its subscription-based models providing steady recurring revenues, continues to attract investors, especially in the current environment. According to PwC, software deals are expected to dominate technology deal making in the second half of 2023, accounting for over 70% of deal volumes.

Despite regulatory challenges, the demand for semiconductors remains strong, driven by their importance in modern technologies. Generative AI is likewise expected to further boost demand. While large cross-border semiconductor deals may face hurdles, investor interest in semiconductor companies for expanding chip-manufacturing capabilities is anticipated.

M&A Outlook in the TMT Industry

PwC’s 2023 study further found that the trend of TMT consolidation is likely to persist, although it may slow down in the latter half of the year as companies prioritise reducing debt to counter higher interest rates. In the first half of 2023, the TMT sector saw a 7% decrease in announced deal volumes, and a substantial 67% drop in deal values compared to the second half of 2022. This decline can be attributed to macroeconomic conditions and the absence of major deals. However, factors such as consolidation among communications service providers (CSPs) are still driving deal activity, as demonstrated by Rogers Communications’ USD15 billion acquisition of Shaw Communications in Canada and Vodafone Group’s sale of a 50% stake in its German joint venture FibreCo to Altice.

The trend of selling digital infrastructure assets, especially cell towers and fibre assets, is, according to PwC’s study, expected to continue in the second half of the year. This sector experienced significant M&A activity in 2022, and this has carried over into the first half of 2023, exemplified by EQT and PSP Investments’ proposed acquisition of Radius Global Infrastructure for around USD3 billion. The demand for digital infrastructure assets remains strong, although the timing of future tower and fibre asset sales may be influenced by higher debt costs and financing availability.

TMT operators are accordingly likely to pursue acquisitions aimed at shifting towards higher-growth revenue streams. These acquisitions will focus on enhancing front-end and back-office infrastructure, with segments such as data analytics, cybersecurity and cloud technology being prime candidates for M&A activity.

M&A Outlook in Media and Entertainment

In the realm of media and entertainment, the global streaming industry is facing growing pressure due to intense competition for subscribers and the high costs of content development or acquisition. Investors are closely examining the sustainability of this business model, leading to potential changes as companies seek to attract new subscribers, explore new revenue sources, and cut costs.

The ongoing strike by the Writers Guild of America (WGA) could have implications not only for US companies but also for international streaming companies, as foreign markets have a strong appetite for US English-language television content. Previous WGA strikes have led to shifts towards non-scripted programming and game shows. However, today’s global production landscape is more mature, and a prolonged US strike could greatly benefit overseas production and streaming companies, potentially replacing some US content with high-quality scripted content produced abroad. The popularity of international titles in the US market suggests a growing interest in foreign programs.

According to industry reports, during the WGA strike, M&A activity is likely to be limited, as investors await the outcome of writers’ demands for better compensation and contractual terms, assessing how these factors might affect the future profitability of streaming platforms. Looking further ahead, the fragmented streaming industry is expected to offer opportunities for consolidation through deal making in the medium to long term.

The live entertainment sector is also attracting interest from investors. The combination of live experiences and advancements in data and technology is driving strategic partnerships and investments in high-profile sports teams. As consumer preferences continue to shift towards experiences, further investments are anticipated in this sector, although the pace might be influenced by economic stability.

Similarly, the video games sector is particularly poised for continued growth in 2023, with an influx of associated M&A deals and opportunities. The demand for interactive content across various platforms remains strong, making it an appealing area for companies looking to enhance their offerings and expand their presence, especially in the emerging metaverse landscape.

Overall, these trends reflect the dynamic nature of the media and entertainment industry, where adaptability and innovation are key drivers of success.

What Next? Will the Same M&A Activity Levels Continue Through 2024?

According to a recent report published by GlobalData, in Q1 2023, the global M&A landscape witnessed a significant downturn, with the total value of M&A deals plummeting by 44% to USD413 billion (down from USD744 billion in Q1 2022). This decline was primarily attributed to concerns about potential global economic slowdown, driven by surging inflation and rising interest rates. These insights come from GlobalData’s recent report titled “Mergers and Acquisitions Deals by Top Themes and Industries in Q1 2023 – Thematic Intelligence”.

The report also highlights a 23% drop in the total count of M&A deals, decreasing from 10,003 in Q1 2022 to 7,738 deals in Q1 2023. Furthermore, the market’s declaration affected the number of mega deals, defined as those exceeding USD1 billion in value. During the quarter, only 79 mega deals were completed, marking a 45% decline compared to the same period in the previous year.

The decline in global M&A activity was evident worldwide, both when compared to the previous year and to within the same quarter, indicating a general sense of caution among investors regarding M&A deals. Considering the subdued state of global M&A in Q1 2023, the outlook for the remainder of the year appears relatively restrained. This is due to the anticipation of higher interest rates and the possibility of mild economic downturns in several crucial markets. Nevertheless, looking ahead to 2024, the M&A market is expected to bounce back as acquisitions continue to play a pivotal role in corporate strategies. That said, given the resilience shown by tech M&A in particular, and despite the general global decline in M&A as a whole, the authors anticipate this trend to continue into the next year.

Conclusions

The TMT sector is highly driven by innovation, and constant advancements in technology (such as 5G, AI and IoT) are creating new opportunities for companies to expand their offerings and market reach. To stay competitive and capitalise on these innovations, businesses often turn to M&A.

The battle for content and distribution rights in the media and entertainment industry is fierce, and streaming services in particular are vying for exclusive content. M&A allows companies to acquire valuable content libraries and production capabilities.

As boundaries between the TMT sector are constantly blurring, companies in this sector are increasingly diversifying their portfolios to offer comprehensive solutions. M&A enables them to quickly access new capabilities and enter adjacent markets. In crowded markets, M&A can be a strategy for gaining market share and reducing competition. Consolidation also helps companies achieve economies of scale and cost efficiencies.

While M&A deals can offer growth opportunities, they also come with challenges and legal implications that need to be carefully managed to ensure long-term benefits in this ever-evolving industry. Regulatory compliance, innovation and strategic integration will be the key determinants of how these M&A activities continue to shape the TMT landscape.