The ‘value gap’ in TMT: First plug, then play
August 22, 2017
First published in TMT Finance on 17.08.2017.
TMT Deals Overview
The first half of 2017 has been rather more pause than play for the UK Technology, Media and Telecoms (TMT) sectors, with the strong levels of deal activity that have been evident over the last 3 years abating slightly. There have still been some significant in-bound deals (SoftBank’s investment in Improbable, for example, and GIC acquiring Acuris) and these drove up the total deal value, but UK TMT deal volumes were actually down 9% overall on the previous year according to Mergermarket data we’ve analysed, with the more active tech segment down 3%. By comparison, the volume of Global TMT deals declined by 5%, whereas Europe saw 14% growth.
For UK tech, the modest year-to-date decline should be set against strong prior years, and we see tech remaining fundamental to the UK M&A outlook. It is dynamic, innovative, and – in many cases – genuinely world-leading. Investors are still hungry for the sector in general, and transformative industry-shaping platforms or innovative consumer-related tech in particular. So what’s holding back deal completions? The answer appears to be in many cases a gap between what buyers are prepared to pay, and what sellers think their businesses are worth. That’s not unique to this industry, of course, but it’s always more of an issue in a sector – like tech – where the multiples are high, because it’s harder for prospective buyers to see a significant upside. The way to bridge that ‘value gap’ is telling a compelling investment story. Indeed, a lot of the work my teams have been doing this year has been exactly that: helping potential sellers understand, capture and communicate the potential upside in their business, so that they can secure a price both parties can agree on and help investors or acquirers gain greater comfort for the long term.
Beyond tech, perhaps the most high-profile mooted media deal, News Corp and Sky remains on hold subject to regulatory review. Telecoms continue to transform to support increasing data throughput and enhanced connectivity, but large-scale M&A at this point is mostly absent. We expect 5G to provide M&A stimulus as vendors in particular look to new capabilities. For many telecoms companies the 5G roll-out gives them the perfect opportunity to refocus their investment to ensure they can take advantage of next generation network technology. My previous piece on Fast Track Network Virtualisation has more information on this topic.
Across our TMT deals team, we are focused on three key elements which help organisations find real sustainable value from M&A:
Growing the top-line
This is about new products, new channels, new markets, and new platforms. What’s the next big thing likely to be? Which areas of the market are set for the biggest growth? And what’s special about what you’re selling? Planning for growth, and articulating that growth story - including the sustainable differentiation vs. current and potential future competitors are critical to creating value.
Using tech to drive transformation
A large proportion of the UK TMT landscape would be characterised as small or medium in size, and rather specialist, deriving its value from a combination of talent and technology. Historically, the people element of that equation made it hard to scale these businesses up, but new applications, software systems like Salesforce, and greater standardisation across the industry is making that scaling up simpler all the time. In this area, a good value story won’t be about the potential for incremental cost-cutting, but how digitisation and automation is opening up entirely new and transformative business models.
Locking in the gains
Whether through organic rapid build-out, or more M&A, there is substantial scope to build from often narrow or niche foundations. An effective value story will explore how astute and skilful bolt-on deals can add value to the underlying business, and ensure the new capabilities become embedded permanently in a company’s DNA.
As I said, we’ve been doing a lot of work in this area in the last few months, and we’re already seeing signs of deal activity picking up. So who knows, we could see the market hitting the fast-forward button in the second half of 2017.