M&A activity in the technology, media and telecommunications (TMT) space slowed slightly overall during the first half of 2020, but dealmaking accelerated in the second half of the year. Following the initial uncertainty created by the COVID-19 pandemic, a return in confidence saw M&A activity pick up sharply and sent deal values in the technology and telecommunications sectors soaring.
Even as vaccines are rolled out, the pandemic continues to affect all aspects of the economy—from daily life for individuals to the conduct of business for major corporations. With strict physical distancing measures still in effect and business practices adapting in response, companies are adopting technology solutions at a brisk pace. Many major TMT incumbents have largely resumed merger and acquisition activities to meet that demand and fuel growth, despite the risk of regulatory and geopolitical scrutiny. However, entertainment subsectors such as cinema, theatre and live events continue to experience significant operational challenges. The resulting distress within these subsectors may drive M&A activity across the TMT landscape as many companies look to restructure in 2021.
We remain bullish on the industry’s M&A outlook for 2021. Although everyday life will eventually stabilise as the rollout of vaccines progresses, the pandemic has accelerated the adoption of TMT offerings. Companies will continue to consider deals as a way to reshape their businesses and maintain or attain market leadership in an increasingly virtual world.
“The technology sector continues to create value in an increasingly digital world, reinforced by changes imposed by the global pandemic. This will spur innovation that leads to more M&A transactions as companies look to diversify their value proposition and/or reinforce their market position.”
Deal values and volumes surged in the second half of 2020, with a strong recovery after some M&A activity paused during the first half of the year in response to COVID-19. While some companies needed to focus on immediate value preservation and the safety of employees and customers, others benefitted quickly from the prioritisation of technology and digital transformation across industries. Companies announced 23 TMT megadeals (with a combined value of close to $350 billion) in the second half of of the year, compared to just 9 TMT megadeals (totalling $68 billion) in the previous six months. M&A trends show that deal volumes in the fourth quarter of 2020 were higher than in any other quarter over the past three years.
We expect to see the following M&A hotspots trending across TMT:
While technology solutions have always played a significant role in M&A activity, the challenges posed by COVID-19 have transformed tech from a ‘nice to have’ to an absolute necessity. On the B2B side, tech subsectors that have benefited from this trend include cloud computing, e-commerce, SaaS and IT security—many of which were already doing well prior to the pandemic. We’ve also seen a separate contingent of companies benefit from the growth of remote work and stay-at-home orders, with e-commerce, streaming services, gaming and video conferencing all experiencing an increase in user engagement. This effect has been somewhat proportional to the severity of lockdown. The trend has been less pronounced in China, for instance, where restrictions have eased considerably in recent months and people have been able to return to work and other activities.
The tech sector’s strong position under the pandemic has led to an increase in M&A activity, higher valuations, historic levels of venture capital (VC) funding and numerous tech IPOs in the second half of 2020. As we move closer towards an end to the pandemic, we see no evidence that the tech sector’s strong performance and competitive deals environment will moderate any time soon.
Stock market indices around the world largely bounced back in 2020, but none so much as technology indices. The NASDAQ Composite had its best year since 2009, gaining 43% in 2020 . This fuelled a number of developments within the TMT sector that affected deals:
With such high valuations, buyers need to have clearly defined value creation plans so that they can maximise the potential of the acquired asset. The increasing importance of environmental, social and governance (ESG) factors is also changing the value of technology businesses and their relative attractiveness to investors. Several technology and telecommunications companies have expanded their efforts to manage waste and reduce energy consumption to address environmental, sustainability and climate change concerns.
While it is too early to predict the impact of a new US presidential administration or further developments in trade relations with China, we expect geopolitical and regulatory headwinds will continue to impact M&A activity trends in 2021.
In the US, regulatory pressure on large tech incumbents is mounting. CEOs of big tech companies were called to testify in Congress multiple times throughout 2020. At the end of 2020, the US Federal Trade Commission and 46 states filed lawsuits alleging that Facebook is an illegal monopoly. Societal issues such as public safety and privacy are also focusing attention on the technology industry. China is also exercising regulatory oversight of public companies and those seeking IPOs. Although regulatory pressures appeared to do little to reduce deal activity during the second half of 2020, they may curb enthusiasm for cross-border M&A transactions, megadeal activity and further consolidation of platforms going forward.
Increasing trade tensions may impact investments overseas by Chinese investors, particularly investments that relate to technology and other sensitive national security concerns. US regulators continue to draw a hard line against the acquisition of key US technologies, and several countries in Europe have increased their scrutiny of potential Chinese investments. India also made a move to limit the tech presence of China within its borders when it banned a large number of Chinese apps in July 2020, citing security concerns.
Advances in technology such as industrial IoT, artificial intelligence, driverless cars and cloud computing will shape the future, but not until network capabilities have expanded and sufficient broadband infrastructure exists globally.
Telecommunications companies are already progressing in the 5G rollout in anticipation of these demands, and we expect to see further consolidation in this space as companies compete at a global scale.
A healthy queue of technology companies are still looking to go public in 2021. We anticipate that this will provide ample consolidation opportunities among companies looking to expand their service offerings or solidify their positioning in the market. We expect the biggest beneficiaries of consolidation to be the large technology companies, though increased regulatory oversight could limit megadeals in some more heavily scrutinised subsectors.
With the TMT sector proving to be exceptionally resilient to the COVID-19 environment and with considerable further potential for consolidation, we believe that TMT M&A activity will continue to be strong in 2021 and beyond.
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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 31 December 2020 and as accessed on 3 January 2021. This has been 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.