As COVID-19 continues to impact the global economy, investors appear to view many industry sectors within Technology, Media & Telecommunications (TMT) as highly attractive, with the Nasdaq Composite recently hitting all-time highs, supported by companies either shielded from, or directly benefitting from, the ongoing crisis. Nevertheless, the first half of 2020 saw a significant decline in global TMT mergers and acquisitions (M&A) as investors focused on liquidity, cost containment and short-term portfolio protection.
COVID-19 accelerated existing trends as businesses continue shifting to all things digital, e-commerce displaces traditional stores, mobile app-based food-delivery providers capitalise on social-distancing restrictions, consumers hasten their switch to streaming over traditional media and remote working increases. The movement towards digitalisation will spur companies to use M&A to improve their capabilities in this space. TMT companies that adapt their strategy and deliver value in the current environment will be strongly positioned when the economy recovers. The large technology companies will continue to do well, although they will need to deal with increasing regulatory scrutiny globally.
We expect TMT M&A activity to pick up in the second half of 2020, although global trade frictions will remain a headwind throughout the year. M&A activity is expected to return as companies focus less on capital preservation and start seeking new opportunities. Those companies affected by COVID-19 will take a closer look at their existing businesses to evaluate which areas are core and which to divest.
“2020 has seen capital shift strongly towards technology companies. We believe technology and telecommunications investments will increase, as companies look to technology to upgrade capabilities and offerings.”
Deal values and volumes declined in the first half of 2020 as COVID-19 led companies to curtail many forms of spending. Many of the deals announced or completed in the second quarter had begun prior to coronavirus shutdowns and were generally smaller transactions. Media & Entertainment M&A activity was heavily impacted as advertising revenues dried up, cinemas closed and live sporting and cultural events were cancelled, reducing many revenue sources for traditional media companies.
The US led the world in terms of deal values and volumes, while China was second.
We see the following trends as drivers of M&A hotspots across TMT:
Businesses that were performing well prior to COVID-19, such as cloud, SaaS and security companies, have felt additional benefits from social distancing and remote working. The BVP Nasdaq Emerging Cloud Index is 30% above its previous record high, illustrating the outperformance of cloud and SaaS companies. While these valuations are expected to fuel more IPO activity, the increasing premium of cloud companies over non-cloud hardware and software companies may significantly reduce M&A as a vehicle to accelerate the movement to cloud.
Large tech companies also continue to broaden their footprint, supported by continued M&A and benefitting from their diverse operations, extensive geographic reach and significant resources. Although global advertising revenues have suffered, big players dominating the space are protected by their strong cash balances. Small competitors will emerge in a much weaker financial position and may become consolidation targets.
E-commerce is taking precedence over physical retail as consumers avoid public spaces. Companies such as Amazon have become staples for many consumers, while upstarts such as Wayfair and Shopify take market share from their physical retail counterparts. Brick-and-mortar retailers, many of whom were struggling to address e-commerce trends before the pandemic, may look to rapidly acquire online capability to survive.
Consumers have moved to streaming options and accelerated their “cord-cutting” over the past few months as COVID-19 impacts household incomes and consumers curtail their subscriptions in the absence of traditional sports broadcasting. E-sports has taken advantage of this vacuum to increase presence and audience.
Finally, telehealth has seen a major surge as many healthcare providers and patients looked to avoid in-person visits. We expect this change in consumer behaviour to persist and for providers to consider acquiring capabilities relating to virtual consultations.
Explore the other key themes driving M&A activity.
Existing geopolitical pressures remain alongside the broader impacts of COVID-19, and those of the ongoing US/China trade relations continue to be felt globally. Tariffs are forcing companies to re-evaluate their supply chains. In response, large Chinese manufacturers are accelerating their investments by setting up duplicate supply chains in the US or other regions. Chinese semiconductor companies are looking to develop more homegrown chips in response to a recent tightening of rules by the US, intended to restrict the sale of US semiconductors and semiconductors produced directly from certain US technology and software to China’s Huawei.
We expect Chinese inbound investment to the US to slow as US regulators continue to draw a hard line against the acquisition of any key US technology. The EU has also recently increased scrutiny of potential Chinese investments.
Changing trade relations have resulted in downstream impacts on territories looking to receive investments from either China or the US, specifically in relation to the development of 5G infrastructure.
Territories are increasingly looking to technology companies for the know-how to develop the necessary virus-mitigation and containment tools, such as contact tracing or “immunity” passports. Given the recent scrutiny of technology companies and data privacy, it remains to be seen how regulatory agencies will react, but there may be opportunity for regional M&A in this space.
Explore the other key themes driving M&A activity.
As a result of COVID-19, companies are focusing on their core competencies to ensure customer access to products and services. Supply-chain costs, already rising due to the impact of changing trade relations, will be further increased by the disruption caused by COVID-19. This will lead many to rethink their strategies. As companies focus on value preservation and margin protection, we expect some of the large tech players to move segments of their manufacturing from China to Vietnam, Thailand and India as they seek to repair and reconfigure their operations.
While many enterprise technology companies have benefitted from increasing demand for online and remote capabilities, many will likely see a revenue decline as the recession impacts global technology spending. Accordingly, tech companies will need to assess workforce levels and non-discretionary spending to maintain profit and cash-flow margins and those more significantly impacted may present opportunistic acquisition targets.
As consumers’ streaming usage increases, we expect more content-related acquisitions to occur to meet the new demand. Changes to content consumption will also create new sports and entertainment opportunities. Social distancing has benefitted online gaming and we are seeing a wave of gaming acquisitions as this space continues to consolidate.
Construction of digital infrastructure, particularly 5G networks and data-centre capacity, will require investment and will accelerate divestitures of non-strategic assets to free up capital to reinvest. Both India and Japan have witnessed large investment in IT infrastructure to create sufficient data-centre/cloud support for increased connectivity and data storage needs. We continue to see large data-centre companies using acquisitions to expand globally.
Overall venture-capital financing has been strong and we continue to see record valuations in certain industries. However, the valuations of some tech unicorns, impacted by COVID-19, have declined, which may lead to the large tech companies seizing opportunities to complete acquisitions.
Explore the other key themes driving M&A activity.
COVID-19 has had a significant impact on the TMT space, accelerating trends that we expect to persist longer term. As a result, we expect many companies to provide more opportunities for employees to work remotely, making technology companies more attractive M&A targets for buyers looking to improve or supplement their existing capabilities.
As companies look to strengthen their market and competitive positioning, they will need to rethink all aspects of the business from workforce, products and services to end-user experience and how these are all facilitated by a digital platform. Reconfiguration may be made easier because COVID-19 has provided a rare moment of pause – an opportunity to make changes that previously seemed too daunting or even impossible to execute.
We believe those companies that adopt a structured value creation methodology to identify and articulate the drivers of value created or lost through COVID-19 will be well placed to find opportunities in the TMT sector.
We expect the large technology companies to emerge stronger from COVID-19 than their less well-capitalised competitors and despite the regulatory scrutiny, we expect them to continue to pursue deals. More stock-based transactions are likely in the short term as a means to address relative valuation uncertainties and as companies look to preserve cash.
Dealmaking itself may also transform, replacing in-person interactions with virtual processes to assess talent, evaluate company culture and execute on a value creation plan. Sellers will need to set up their own virtual process to provide transparency and give buyers comfort in closing the transaction.
While COVID-19 has undoubtedly had a large impact on M&A transactions over the past several months, we believe many TMT sectors have proved exceptionally resilient and deals will continue to recover through the remainder of 2020.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 30 June 2020, and supplemented by additional information from Dealogic and our independent research. This document includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. We define megadeals as transactions with a deal value greater than US$5 billion.