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The Future of TMT M&A

Trends in M&A Deals and Due Diligence Processes

by Abby Roberts, Sr. Director, Product Marketing

So embedded is technology in the business world that speaking of it as a separate industry, distinct from all others, is increasingly difficult to do. Like the hinges on a door, it is at once critical to opening-up new industry landscapes and indistinguishable from the landscape itself. M&A opportunity, then, lies not within technology or a specific industry, but at the intersection of them both. 

That was one key learning from our Technology, Media, and Telecommunications (TMT) M&A Spotlight panel. But what else is on the horizon for TMT M&A? Here are some other top takeaways from our panelists and real-time audience polling of 500+ finance professionals:

1. Expect more gaming M&A deals. One trend today is the hyper-growth of interactive forms of content, according to Chris Walsh, Executive Director at Morgan Stanley. Video games are expected to grow 10% while other forms of media are only growing in low to mid-single digits. “It’s around us wherever you go.”

Today’s video games aren’t those solo experiences in your parents’ basement. It’s very social, multi-player, and online driven. Younger generations are turning to video games not just as an interactive experience but as a social experience. 

- Chris Walsh

“Why is that happening? I think it’s the prevalence of mobile devices today,” Walsh says. “Ten years ago, people were spending 3% of their time on mobile devices; today it’s closer to 30%.”

2. Watch the low-code/no-code space. “Companies focused on low-code technology, or platform software that gives you the tools to develop your apps internally, are booming,” says Jose Garcia, Executive Director at Moelis & Company. Low-code enables businesses to fill in technology gaps without waiting for developer talent. That’s mission-critical in an environment where many corporates have a multi-year long backlog of necessary software due to the global developer talent shortage. 

You no longer need to be a coder to develop your own apps.

– Jose Garcia

3. Dive deep into the Industrial Internet of Things (IIoT). “We’ve seen technology and software around everything industrial,” says Garcia. “IIoT has almost endless potential; whether it’s digitalization across the shop floor or the supply chain or the warehouse.” (For more on this topic, see our Industrials M&A Spotlight or download our infographic 8 Tech Myths about Industrials M&A.)

4. Avoid M&A data pitfalls. Regulators across disciplines, including antitrust/competition, data privacy, and national security, are increasingly focused on how confidential data and other sensitive information gets shared with interested parties during and after M&A processes. And no sector owns more data than TMT.

As a result – and politics aside – TMT finance professionals take a well-rounded view on what’s likeliest to break a deal in 2020, according to our webinar audience polling.

5. TMT disrupts itself too. Like other sectors, the TMT industry struggles to adapt to the fast pace of technology change. Interestingly, when we asked the audience what posed the greatest obstacle to technology change, the same issues arose as you would expect in non-tech dominated fields, like culture/operating model, legacy technology, and “The Knowing/Doing Gap” (knowing you have to transform but not sure how to go about it).  

These results present an interesting contrast to a similar poll we conducted during our Merrill Insight | Healthcare M&A Spotlight earlier this year. In that poll, 40% of the audience picked data connectivity as the top reason healthcare-technology transformation fails, followed by tech/healthcare collaboration as a distant second at 23%.

 

When looking at technology-enabled business, much of the opportunity will sit with the talent. Knowing when to engage with those people and at what level is critical.

- Tara Waters

6. Potential Buyers Beware. Cultural fit and operating model don’t just impact internal technology change. Our audience flagged seller and buyer cultural fit as the hardest thing to get right in TMT due diligence, with Talent Assessment and Technology Validation hard on its heels.

Organizations struggle with cultural fit. Effective dealmakers have a clear culture due diligence and integration playbook. And it's not just an HR assignment; the full deal team owns it. 

- Erich Studer, M&A Transaction Services Market Leader, Mercer

30% of M&A transactions fail to meet financial targets due to cultural issues like damage to employee morale, productivity loss, customer disruption, and talent flight, according to a Mercer M&A Culture Report

7. Prep for Sell-Offs.  Traditional TMT companies love nothing more than down-cycle spin-outs and divestitures. With recession fears looming and some high-profile unbundling already in the news, corporates should be reviewing their assets with an eye toward the sell-side.

“Once you realize you should divest, it’s too late,” Walsh says. “There are plenty of investors out there looking for their next target; if you aren’t proactive about taking a line in the sand around corporate strategy and addressing underperforming businesses, then you’re ripe for an activist shareholder.

So what is the right amount of time to prepare for an asset sale? Our TMT polling respondents fell between 6-18 months.

The amount of time it takes to prepare for a sale is always vastly underestimated. As soon as you have people trolling through your data room, they’re going to throw up a million new questions.

– Tara Waters

How far in advance should companies start prepping for a divestiture?

Culture and technology talent issues also are key to consider in a divestiture, says Erich Studer, M&A Transaction Services Market Leader. In a tight labor market, as soon as you start bringing people into the tent regarding divestitures, they start worrying about what the future buyer is going to be like and the implications for staff at both SpinCo and RemainCo. The disruption causes affected team members to consider options in the marketplace—so dealmakers need to have a well-planned retention and communication strategy.

Regardless of whether TMT is your official industry, technology touches every aspect of what you do, including how you use technology in the due diligence process. Find out how Merrill DatasiteOne is using technology to accelerate and improve M&A processes in the data room.

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