M&A in the TMT sector: Deal drivers and opportunities
Globally, merger & acquisition activity in the telecoms, media and technology (TMT) sector is expected to increase in 2021, as organisations look to shore up their balance sheets and use synergy savings to drive improved financial performance. Experts from Baringa Partners share the most common M&A drivers and opportunities.
1. Scale
Growing in scale allows TMT companies to access more customers, to spread large investments across a broader customer base, to gain synergy savings and at the same time increase their buying power when negotiating content and partnership deals with the US giants.
2. Quad play or convergence
Many of the deals in the UK will allow these joint entities to offer more products to their customer base. The long-awaited monetisation of quad play deals is seen as both a revenue generator, but also a defensive churn reduction mechanism.
3. Efficiency
The UK telecoms, media and technology sector is one of the most highly competitive markets in the world and M&A enables companies to drive down their cost base and offer lower prices to their customers whilst maintaining, or improving, margins.
4. Shareholder returns
Long term corporate shareholders and Group parent companies are looking to monetise their stakes in these businesses, to ward off predatory buyers and unlock hidden value and higher valuations.
5. Obtaining more capabilities
Accessing new products and capabilities that can help the companies accelerate their transformations and quickly take advantage of the disruption in the market. For example, telecoms and media companies becoming more like technology companies, driving platform businesses, and accessing new customer segments.
Opportunities from M&A
In addition to the five main drivers, there are also a number of other benefits that M&A can drive:
1. Being a catalyst for change
Due to the historical pace of change in the industry many telecoms, media and technology companies recognise that they might have an outdated operating model for today’s business environment. It is, however, often very difficult to make the case for changing the operating model when the management team is focused on day-to-day trading in an aggressively commercial world. This can be short termist and reduce shareholder value over the long term.
M&A forces a business to re-think its operating model and gives it an opportunity to re-base its operation to be more relevant to the future trading environment and to move to new business models and bring on new capabilities, for example, digital, agile, platforms, etc.
2. Delivery of synergy savings
M&A, if planned well, helps organisations deliver short term and more strategic synergy benefits. Nearterm benefits from legal entity rationalisation, head office synergies and procurement savings, through to more strategic savings in networks (consolidation/wholesale) and IT rationalisation.
Also, improved Revenue Generating Units (RGUs) and Average Revenue per User (ARPU), resulting from new and more integrated products and services. If managed well, the efficiencies can make the combined organisation more competitive and the revenue benefits can drive improvements in market share and ARPU.
3. The challenge of sacred cows
All organisations have a list of sacred cows that it is very difficult to overcome – for example, the move away from engineer installs to self-install, breaking down product siloes and product P&Ls to move to a more customer-centric P&L, how far to drive the self-service and online agenda, how much high street presence to have (if at all).
M&A allows both businesses to directly compare their operations and, if managed well, can be used to break down the sacred cows and address them head on – usually to the benefit of the profit & loss.
4. A refresh of management and better engaged workforce
M&A gives both the opportunity to retain top talent by promoting them into larger roles in a larger business, as well as the ability to replace less able/relevant management via the integration process. If selected people in management positions leave as part of an integration, it gives opportunity for progression to more junior staff – something they might not have achieved during the status quo.
Therefore, a well-managed integration can leave the business with a refreshed leadership team and a more engaged work force.
