Confidence in the mergers and acquisition (M&A) market is rising, with 58% of technology, media and entertainment, and telecommunications (TMT) executives planning to pursue M&A in the next year – up from 42% six months ago. This is according to the 20th edition of the EY Global Capital Confidence Barometer (CCB), which indicates that concerns around regulatory headwinds and competition are not preventing businesses from harnessing the transformative power of M&A.
Seventy-three percent of TMT executive respondents expect the number of deal completions compared to the past 12 months to increase – up from 51% six months ago – despite a recent escalation in trade tensions across the globe. This is underpinned by rising confidence in economic conditions, with 94% of executives anticipating an improvement in the global economy and over three quarters expecting to see an improvement in corporate earnings (87%), credit availability (87%) and equity valuations (76%).
The CCB indicates that all TMT executives are planning significant investment in technology this year. Nearly a quarter of sector respondents (23%) cite acquiring technology, talent, new production capabilities or innovative start-ups as the main driver for acquisitions.
M&A emerges as new growth engine for technology companies
The CCB points to a surge in deal appetite among technology businesses, owing in part to the US Federal Reserve’s decision not to increase interest rates in 2019.
Sixty-one percent of technology respondents expect to actively pursue M&A in the next 12 months, up from 40% in October 2018. Most respondents (92%) believe that the technology sector economy is improving overall – compared with 51% six months ago, while 80% say corporate earnings, short-term market stability and credit availability are all improving. Further, 65% intend to pursue cross-border technology acquisitions, up from just 26% six months ago.
Year-on-year deal volume and value reflect this sentiment – up 2% and 39% respectively in Q1 2019, highlighting that larger technology deals are on the rise.
Ken Welter, EY Global Technology Transactions Leader, says:
“With more technology companies buying assets to extend their stack, together with a reduction in research and development and capital spending, M&A is becoming the new engine for growth. An active deal market underscores the reality that, despite geopolitical uncertainty, transformational technology deals are required to evolve today’s businesses – not only to win in the market but also to survive. To compete in this landscape, companies will also need to integrate their businesses without derailing an acquisition’s growth engine.”
Media and entertainment executives bullish in pursuit of transactions
Favorable performance of the capital markets and optimism about the transformative power of dealmaking is driving strong confidence in the M&A environment among media and entertainment (M&E) companies. Eighty-five percent of M&E respondents expect the M&A market to improve in the next 12 months, compared with 64% in October 2018.
Despite continuing speculation around macroeconomic and geopolitical instability, most M&E executives (95%) say the sector economy is improving – up from 48% six months ago.
The survey further highlights the imperative for companies to build agility and resilience into the enterprise, with the number of executives reviewing their portfolios on a quarterly basis rising from 23% to 49% in six months. Indeed, 53% expect to actively pursue deals in the year ahead – exceeding the 10-year survey average (46%).
Will Fisher, EY Global Media & Entertainment Transactions Leader, says:
“Media and entertainment companies continue to use M&A to position themselves for the future, as they look to acquire existing popular content and the creative talent to secure future hits, exclusive data and expertise to create unique and tailored product offerings, or access to large audiences and subscriber bases. Today’s market conditions are set to ensure that an active market continues, with increasing competition for truly unique assets. To prevail, media and entertainment executives must carefully assess the value creation opportunity available through integration, and the risks associated with achieving the estimated synergies.”
Telco M&A indicators improving, despite regulatory risks
Telecommunications sector executives are optimistic about the power of M&A to realign their technology portfolios and transform for growth. Eighty-two percent say the telco M&A market will improve in the next 12 months – up from 65% year-on-year, while 58% expect their M&A pipeline to expand in the coming year.
With 5G commercial launches close to fruition in many markets, 55% of executives say they expect to actively pursue acquisitions in the year ahead. And expansion into adjacent sectors ranks as the highest strategic growth priority for telcos (27%), as opportunities associated with the Internet of Things (IoT) offer the promise of new convergence plays.
The regulatory environment continues to pose challenges, however, with 72% citing its influence on deal strategy.
Axel Majert, EY Global Telecommunications Transactions Leader, says:
“With digital infrastructure investment trending up worldwide, operators are reshaping their organizations to take advantage of a new growth agenda. But this requires more than simply repositioning products and services to cater for new addressable markets. Changing considerations of core and non-core activities continue to fuel the telco M&A agenda, as operators look to secure access to fresh thinking and new capabilities.”