This article explores the underlying causes and distinctive characteristics of the current trends in mergers and acquisitions (M&A) within the technology, media and telecommunications (TMT) market. It draws upon the authors’ extensive experience, supplemented by insights from news sources and specialised industry reports. The analysis delves into the factors driving these trends, such as technological advancements, market consolidation and strategic investments.

Additionally, the article examines the impact of AI and digital transformation on M&A activities, highlighting how these innovations are reshaping the competitive landscape. It also considers the role of regulatory changes and economic conditions in influencing M&A strategies. The article provides a forward-looking perspective and potential implications for stakeholders. It discusses the risks and opportunities that may arise from these M&A activities, including market volatility, integration challenges and the need for robust due diligence. The authors emphasise the importance of staying informed and adaptable in a rapidly evolving market to navigate the complexities of TMT M&A successfully.

Waning M&A Transactions

The current macroeconomic landscape has significantly slowed activity in M&A. Geopolitical tensions, supply chain disruptions, inflation and rising interest rates have collectively dampened enthusiasm for deal making. In 2023, private equity and principal investors were major drivers of global M&A activity. However, they have now retreated, reducing their activity. This is largely due to the high costs of capital, uncertainty surrounding central bank policies and increased regulatory scrutiny.

At Preiskel & Co LLP, the authors’ experience aligns with the broader trends in the TMT sector; however, the authors continue to see M&A activity in the TMT sector, where the firm’s work covers both national and international transactions, often with no direct connection with the UK. 

Although there has been a general decline in M&A activity from the record highs experienced in 2021, the TMT sector continues to be a highly attractive area for investment and M&A. This sector’s appeal is expected to persist in both the medium- and long-term.

Several factors contribute to the sustained interest in the TMT sector. Technological advancements (such as the proliferation of AI), the expansion of 5G networks and the increasing importance of cybersecurity are driving innovation and creating new opportunities for growth. These developments are compelling companies to seek strategic acquisitions to enhance their capabilities and maintain a competitive edge.

Moreover, the digital transformation across various industries is fuelling demand for TMT solutions, further boosting the sector’s attractiveness. Companies are increasingly looking to integrate advanced technologies into their operations, leading to a surge in investments aimed at acquiring cutting-edge software, platforms and services.

Despite the broader economic uncertainties and market fluctuations, the TMT sector’s resilience and potential for high returns make it a focal point for investors. Private equity firms and corporate investors are particularly drawn to the sector’s dynamic nature and the promise of long-term value creation.

TMT firms have been seen making significant strides in addressing climate change and promoting sustainability. The ongoing deployment of low-Earth-orbit (LEO) satellites continues, despite concerns about potential collisions. In higher orbits, the development of radiation-resistant microchips is revolutionising space technology. Additionally, virtual production techniques are becoming integral to modern blockbuster films and the emerging metaverse, shaping the future of entertainment and digital experiences.

Current TMT M&A Market Trends

The increasing availability of AI, along with the ongoing development of AI-driven processes and generative AI, has positioned software as the primary driver of M&A within the TMT sector. According to PwC, nearly 70% of the top ten technology deals by value in the first half of 2024 were software-related, amounting to over USD70 billion.

The authors’ clients have increasingly integrated AI systems into their products across various secondary sectors, such as energy, hospitality and professional services. This integration has enabled them to secure multiple funding rounds, highlighting the growing importance and investment in AI technologies.

The demand for AI and the digital infrastructure required for its implementation has led to private equity (PE) funds and investors preferring direct capital investments in AI processes over traditional M&A activities. This shift has necessitated PE funds’ exploration of innovative strategies to generate liquidity for their investors.

Furthermore, the valuation of UK companies remains lower than pre-Brexit levels. Strategic corporates are taking advantage of this discount to diversify and consolidate their respective markets, using the current economic landscape to their benefit.

Advancements in AI and its applications are reshaping investment strategies within the TMT sector, with a notable shift towards direct capital investments in AI technologies, rather than through M&A. This trend is expected to continue as AI becomes increasingly integral to various industries, driving both innovation and economic growth.

Smaller Deal Values

In today’s competitive landscape, many businesses view digital transformation as a strategic opportunity to secure the “early bird” advantage over their competitors. For others, the focus is on achieving operational efficiency and stringent cost control to boost profit margins. Over the past year, there has been a notable surge in AI-focused transactional activity, a trend which shows no signs of slowing down. Technology-driven companies continue to attract the highest valuations, encouraging shareholders and management teams to explore various investment and exit strategies. Investors are becoming more risk-averse, with acquirers opting for more modest transactions, rather than taking a gamble on seed or A-series targets.

Recent interest-rate cuts by the European Central Bank may be a nod towards further interest-rate cutbacks. These long-anticipated interest-rate cuts are set to be a welcome relief for deal makers aiming to use debt to finance acquisitions. In the current climate, higher interest rates have been squeezing returns, placing greater emphasis on the value-creation potential of deals. This shift in focus has become particularly concerning for some start-ups, which find the heightened scrutiny challenging.

Evolution of Deal Structures

Valuation differences have led to the rise of performance-based deal structures to bridge pricing gaps. Earn-outs have become more sophisticated, now measuring not only financial outcomes to support return on investment but also validating broader assumptions that underpin the investment case and benefit the wider buyer group. These benefits may include cost savings, product development and staff retention. Despite the integration challenges posed by earn-outs, deferred consideration pricing models are extending over longer periods and making up a larger portion of the enterprise value.

Environmental, social and governance (ESG) factors have also become more prominent, as investors are increasingly using ESG criteria to make decisions. Companies with strong ESG foundations are more favourable, and are more frequently seen as sustainable and less risky, making them more attractive to investors. The authors have seen an increasing number of warranties framed around ESG, as acquirers place more emphasis on compliance with ESG targets. 

Protracted Deal Timeframes

M&A deals are taking notably longer to complete than in the past, which coincides with a more risk-averse investor pool and with a more cautious approach to risk management being taken by acquirers in the current market, involving increased emphasis on earn-outs and deferred payment. Heightened regulatory scrutiny has also increased execution risk and deal timelines.

Notwithstanding that we are experiencing a buyer’s market, many acquirers have shown little to no urgency in completing deals. Many acquirers have been spending more time “kicking tyres”, with one eye on the developing macroeconomic situation.

The authors would hope to see more deals moving through to completion following greater clarity in the political and economic climate.

AI and Technology in M&A

Since the introduction of ChatGPT, AI-driven processes have become a highly sought-after resource and have been likened to the advent of the modern internet 30 years ago. AI and AI-driven processes are still in their infancy and continue to show teething problems, such as bias, security issues and inaccurate input. However, the growth potential for AI is unrivalled. It is a rapidly growing field with applications across various industries, from healthcare to finance and entertainment. Companies that successfully leverage AI will see significant growth in the coming years.

The M&A process has seen the integration and application of AI; whether acquiring or being acquired, the use of AI will increase efficiency and lower cost. For the acquirer, the digitalisation of the M&A process itself has significantly impacted on deal speed, enhancing the due diligence process and reducing overall transaction cost. For the acquired, increased digitalisation aids value creation, provides for smoother transition and minimises technology-related risks (such as cybersecurity) in the integration phases.

The Dominance of Private Equity

Private equity (PE) sitting on record levels of uncapitalised investment continues to be a major driver in M&A. PE houses often favour TMT and industrial manufacturing, which are among the most active sectors for PE deals. These sectors are attracting significant investment due to their growth potential and strategic importance.

The general decline in M&A “mega-deals” has led to PE firms more frequently participating in mergers, acquisitions, joint ventures and minority shareholdings within the lower-middle market. This shift is largely due to the high cost of capital and the preference for more manageable investments.

With traditional bank-lending slowing down, PE has become a vital source of capital for corporates, and continues to spur the M&A market. However, whispers of tighter regulatory oversight and uncertainty under the new government means that PE firms will need to keep abreast of, and navigate, potential hurdles if they are to maintain dominance in the M&A market.

In 2024, the slowdown in PE exits indicates that fund managers are focusing more on quality than on quantity when selling. Despite challenging market conditions, they have managed to secure healthy valuations. Consequently, PE firms are now placing more emphasis on value creation and are seeking further organic growth opportunities following previous rounds of PE ownership.

However, PE funds continue to sit on record levels of aging “dry powder”, which has been horded over the past number of years. PE funds will begin to come under fire from investors to invest, raise further funds and create liquidity. Ultimately, the uncertainty in the market means that PE funds have been on the fence with regards to capital deployment. 

With an optimistic eye on the future, PE firms may be seen rushing to deploy their dry powder and to diversify portfolios, before any potential regulations begin to show teeth. 

Economic Situation in the UK

The recent change of government and the Autumn Budget – not to mention the increased labour cost – will undoubtedly negatively impact on many businesses. The worldwide impact of US elections and global conflicts are also influential factors.

Despite this, global TMT deal kick-offs jumped 15% in the last six months, prompted by the generative-AI hype, steadying inflation rates, and pent-up supply and demand – this according to virtual data room provider Datasite, which claims to have seen a 12% uptick in TMT deals year on year. The UK ranks fourth in the top five regions by total sell-side kick-offs between July 2023 and August 2024, behind only the USA (West and South) and Germany.

Datasite records that, on average, the EMEA region saw an increase of 10% in potential sellers in 2024, with average deal closure down by 1% generally and down by 11% in relation to mid-market deal closes. This is likely a sign that investors are “kicking the can down the road” until they begin to see evidence of more favourable market conditions. Stability will always be key to the open market, and not least in M&A transactions.

Looking forward, many investors, PE houses and corporates who made acquisitions at the height of the cycle in 2021 will be looking for a return on investment and liquidity moving into 2025, having seen out their third financial year. In turn, some may look to the improving M&A market for secondary sales, bolt-on acquisitions and divesture as they seek to consolidate. The authors are hopeful that the mounting pressure on PE funds to deploy their dry powder will spark the next bull run for M&A markets.

Outlook for 2025

Ultimately, the driving force behind transactions is stability. Investors, PE funds and corporates need assurance that the decisions they make today will remain relevant and beneficial in the future. With recent elections in Europe and the USA now concluded, there is a growing sense of predictability regarding interest rates. This newfound stability, coupled with the necessity to deploy aging stockpiles of capital, suggests that we may begin to see a resurgence in the M&A market.

The disruptive rise of generative AI is poised to play a significant role in this revival. As AI technologies continue to advance and integrate into various sectors, the TMT sector is expected to remain a cornerstone of M&A activity. The transformative potential of AI-driven processes and innovations is creating new opportunities for growth and strategic acquisitions, ensuring that the TMT sector will continue to attract substantial investment.

Moreover, the predictability of interest rates is crucial for long-term planning and investment strategies. As financial markets stabilise, investors and corporations are more likely to engage in M&A activities, confident that their investments will yield positive returns. This environment of stability and predictability is essential for fostering a robust M&A market.

In addition, the need to deploy capital that has been accumulated over time is becoming increasingly urgent for PE funds. Investors are seeking opportunities to put their funds to work, and the TMT sector, with its dynamic and rapidly evolving landscape, presents an attractive avenue for investment. The continuous advancements in AI and digital technologies are driving innovation and creating new market opportunities, making the TMT sector a key area for future M&A activity.

By way of conclusion, as we move into 2025, the combination of stable economic conditions, the imperative to invest capital and the ongoing advancements in AI will likely result in a vibrant M&A market. The TMT sector, in particular, will remain a stalwart pillar of this activity, driven by the transformative potential of generative AI and other technological innovations.