Technology companies leverage M&A for innovation and growth

Technology, media and telecommunications companies find themselves in a period of rapid change, as digital and new technologies shift borders and transform whole industries. New analysis shows technology firms are increasingly interested in acquiring companies, in a bid to grow, access innovation, and expand into new segments.

While merger and acquisition activity has been in a state of flux in recent months, technology investment remains one of the world’s fastest growing sectors, driven by innovation and disruption. The industry, has, in recent years, sought to leverage strategic mergers and acquisitions to acquire access to broader tools, as well as users’ data, among others. Facebook’s acquisition of WhatsApp for instance, or Apple’s acquisition of Shazam are examples of such strategic moves.

The industry remains well endowed with cash, while growing disruption in the Fintech space means that tech companies continue to eye ways of competing across traditional borders – with acquisitions of start-ups being a popular investment route. To better understand current trends within the technology sector, EY released its ‘Can increased M&A competition and better deal making coexist?’ report. The report is based on responses from 3,000 CEOs, of which 621 respondents were from TMT companies.

The tech sector was found to be bullish on the global economic picture, with 83% of respondents to the latest survey saying that global economic growth is improving from their perspective. This represents a solid 20% increase on the same question from the April edition of the survey, and a massive jump from 17% in the survey result of October 2016.

The research notes that the number of respondents who say that their perspective on global economic growth as declining fell from 22% last year to 1% this year. Firms are also bullish about their own prospects for growth, with 80% citing improvement and 20% stability – market capitalisation in the industry grew by 43% from last year.

In terms of confidence the rapid growth of tech industry, market capitalisation is reflected across key indicators. Respondents’ level of confidence at their sector level for corporate earnings hit 71% in the latest survey, a massive 70 percentage point increase from the same period last year. Credit availability increased significantly too, while short term market stability was cited by 68% of respondents as improving. The industry is well positioned in terms of equity valuations / stock market outlook, cited by 46% as improving and 51% as stable.

The current strong position of tech industry respondents places them in a comfortable position to consolidate, expand and access key technologies and talent – through M&A. The number of respondents that expect to pursue M&A over the coming 12 months stood at 57% in the tech industry, a seven-percentage point increase on the previous year and well above the 33% recorded in October 2013.

The tech industry has also increased its acquisition appetite to that of the wider global industry, after considerable divergence between October 2015 and April of this year. The firm notes, however, that while intentions were relatively subdued for the 2015-16 period, actual deal activity was – like much of the wider industry – booming. This year will likely see deal volume decrease by 9% and deal value by 34%.

The key drivers cited by the tech firms surveyed reflect wider trends in the strategic M&A space. The top cited reasons include acquiring innovation (24%) and growing market share (also 24%). Access to new geographies and additional talent follow, at 18% and 16% of respondents respectively. Reactions to changes in customer behaviour and securing supply follow, at 14% and 4% respectively.

Commenting on the sector’s M&A appetite, the authors stated, “The question of how much of today’s tech sector optimism translates into tomorrow’s done deals will be answered in 2018. Tech companies can work to realise their deal making intentions by taking deliberate steps indicated in these pages: re-evaluate their portfolio review process, take advantage of modern analytical tools, prepare for an increasingly competitive M&A market and pre-plan for integration.”