Mergers and acquisitions (M&A) activity in technology, media and telecommunications (TMT) is underpinned by long-term structural growth drivers—digitalisation isn’t going away, and businesses need to innovate and reconfigure in response to dynamic markets. Higher interest rates, inflation, the demand outlook, geopolitical tensions, supply chain disruption and increased regulations are all factors weighing on CEO and investor confidence. Accordingly, dealmakers will be more cautious in 2023, and the hurdle to do deals will be higher, especially larger ones which may attract greater regulatory scrutiny. Nonetheless, we expect that strategic deals and those involving high-quality target businesses will take place.
Successful dealmakers are likely to take advantage of the current economic climate by seeking to identify targets that may be starved for capital or that provide an accretive platform or technology. We expect to see creative structuring as dealmakers navigate the value gap between buyers and sellers given changing expectations around price.
The increased cost of financing may affect transaction values, particularly for high-growth businesses focused on revenue growth and customer acquisition, which is more prevalent in TMT industries, and in larger deals for which financing will be more challenging. Cash-rich companies and investors may take advantage of lower asset prices in the coming months, and we are likely to see further public-to-private transactions, particularly among investors with US dollar-denominated balance sheets.
These signs point to opportunistic M&A in the near term and perhaps an increase in joint ventures (JVs), partnerships and other arrangements in an effort to get deals done.
“We’re in tumultuous times for TMT M&A. Successful dealmakers will need to aggressively follow through on the deal investment thesis to generate returns. This will require robust value creation plans pre-deal, and well-executed implementations post-deal.”
M&A hot spots
We expect the following areas to be hot spots of M&A activity in 2023:
- Software stands strong
- Delayering telecoms
- The metaverse future
- Video games’ big play
Software stands strong
We expect software deals to continue to dominate the sector with a heavy share attributable to private equity (PE) investors. After accounting for more than half of software deals in 2022, PE investment will likely drive software deal volume in 2023 due to attractive business models which combine predictable revenues, high margins and strong cash conversion. We also expect software vendors themselves to acquire new capabilities and enter new markets.
Delayering telecoms
The delayering of the traditional, vertically integrated carrier model will keep pace as operators seek to monetise digital infrastructure. Active portfolio management and optimisation of multinational carrier groups within individual markets will continue to fund capital expenditure and next-generation network deployments. In line with these trends, we expect to see tower company (TowerCo), fibre, Internet of Things (IoT) and data centre deals in 2023.
The metaverse future
We expect companies that are well capitalised, with a strong belief in the future success of the metaverse, to be opportunistic and seek a first-mover advantage which will drive M&A activity. Currently in its infancy, the metaverse provides an innovative way for companies to position their brand and solutions for future success. As the metaverse matures, we expect to see advances in compression, graphics and other areas to enhance the user experience and drive commerce.
Video games’ big play
Investor interest in video game deals is expected to increase in 2023, although heightened regulatory scrutiny may create complexities for larger deals, as we have already seen in the US with the Federal Trade Commission’s focus on the gaming sector. The gaming industry’s loyal user base and original intellectual property create pathways to monetisation through subscriptions, advertising and in-app purchases. Coupled with developments in semiconductor, metaverse and software technology, these factors will keep the gaming space attractive.
“The digital landscape continues to shift at a rapid pace, introducing platforms and solutions which seek to enhance the user experience. This should drive M&A in 2023, as opportunistic players look to solidify their strategic position.”
TMT remains the most active sector for M&A in 2022
Technology, media and telecommunications deal volumes and values, 2018-2022
Sources: Refinitiv, Dealogic and PwC analysis
In 2022, the TMT sector dominated the global deals market, accounting for approximately one-quarter of both deal volume and value. Rising interest rates, recessionary signals, regulatory actions and geopolitical tensions have cooled investor sentiment, particularly in the tech sector, and consequently have led to a softening of the M&A market compared with the record-breaking year of 2021. Overall, TMT deal volumes and values decreased in 2022 compared with the prior year by 21% and 36%, respectively, but were 25% and 38%, respectively, above 2019 pre-pandemic levels.
PE investors are attracted to the TMT sector; in 2022, they were involved in more TMT M&A activity than any other sector.
Global TMT deal volumes and values: % of PE involvement, 2018-2022
PE involvement in deals (whether as the direct buyer, as an indirect buyer through a portfolio company acquisition or as the seller) has grown over the past five years from approximately one-third of deal volumes and values in 2018 to over one-half of deal volumes and values in 2022.
Software deals continue to dominate
Global technology deal volumes and values, 2018-2022
Software deals accounted for approximately two-thirds of tech deals activity and three-quarters of deal values in 2022. Although overall software deal volumes and values declined from 2021, activity in the sector remains above pre-pandemic levels.
Software deals accounted for approximately two-thirds of tech deals activity and three-quarters of deal values in 2022. Although overall software deal volumes and values declined from 2021, activity in the sector remains above pre-pandemic levels.
Key themes driving M&A activity in 2023
Cash is king
Increased interest rates and depressed equity prices have hampered two critical capital levers. Given the resulting higher cost of capital, many dealmakers are shifting their deal strategies to focus more heavily on deploying cash. Past market corrections presented unique opportunities for buyers with dry powder to strike deals at lower valuations, which positioned them well for gains in long-term shareholder value. We expect companies with strong balance sheets to be well positioned to transact in this capital-constrained environment.
Back to basics
Amidst waning valuations, a rising interest rate environment and reduced access to major capital markets, companies exhibiting strong fundamentals are becoming increasingly attractive as targets. Dealmakers have shifted their attention from targeting large platforms that lack a history of profitability to investing in business models which exhibit strong recurring revenue streams and higher margins. As such, we expect the elevated interest in midsize software-as-a-service (SaaS) companies with high margins to continue to drive transactions across the sector.
Regulations inhibit the global market
Regulatory uncertainty and geopolitical tensions are expected to further complicate dealmaking in 2023. Specifically, US antitrust and data privacy laws; European anti-monopoly regulations; increasing environmental, social and governance (ESG) requirements; and tensions with China may inhibit M&A activity. In Europe, regulators’ anti-monopolistic agendas have blocked mergers of equals in industries such as media in which consolidation is viewed as crucial to competing with international players. Furthermore, increased scrutiny on Big Tech, data privacy and ESG all point to why dealmakers will increasingly need to consider the regulatory environment in their deal strategies.
Technology
- Software: Software will continue to dominate TMT M&A. PE investors accounted for more than half of software deals in 2022, and this is expected to continue, driven by software companies’ attractive business models combining predictable and growing revenues, high margins, and strong revenue generation. Software vendors will themselves continue to be acquisitive to gain access to new capabilities and to enter new markets. Cash-rich organisations will take advantage of depressed public company valuations, and we may see a number of large transactions as boardroom confidence improves.
- IT services: Cybersecurity, DevOps, software development, digital transformation and low code will be key themes for 2023 in IT services deals. These segments are seeing above-trend growth and margins as organisations undergo digital transformation and security risks continue to grow. Talent scarcity will drive IT services businesses to buy scale in key capability areas. Growing recurring revenue enabled by managed services propositions and reselling SaaS solutions is making IT services companies more attractive to dealmakers, including PE.
- Semiconductors: Semiconductor deals are likely to be subdued in 2023, largely because of a tightened regulatory environment. Several blockbuster deals have failed to close based on antitrust and national security concerns; for example, US-based Nvidia’s attempted acquisition of UK-based Arm and China’s Sai MicroElectronics’ attempted acquisition of Germany-based Elmos Semiconductor. US semiconductor companies are investing in domestic manufacturing facilities, spurred by the CHIPS for America Act and the FABS Act, which are designed to strengthen US semiconductor manufacturing, design and research. This is likely to inhibit cross-border megadeals. Outbound investment in overseas semiconductor companies by Chinese organisations will likely be constrained, particularly in the US and Europe, due to national security considerations. However, chip shortages and supply chain issues will likely drive non-semiconductor businesses that rely on chips for their products and services to consider acquisitions to gain greater control of design, intellectual property and supply.
- Internet: Internet dealmaking is likely to be more subdued in 2023 following Elon Musk’s $44bn acquisition of Twitter. Pressure on consumer wallets from inflation and macroeconomic factors is likely to reduce advertising revenue streams and put downward pressure on subscriber growth. Additionally, regulators are increasingly focused on data privacy, child safety and competition, adding costs and constraints to internet business models.
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Media
The media industry experienced consolidation over the past year, but 2023 may prove a point of inflection as capital discipline becomes a central focus for key profitability-conscious players. In the previously capital-saturated market, companies directed funds towards content and subscriber growth. In 2023, investors will exercise more cautious capital spending focused on more deliberative content spend, reducing subscriber churn and the rollout of advertising-based video on demand (AVOD).
- Live sports: Customer demand for live sports has been a consistent deal driver from team sales to advertising. In the National Football League, the Denver Broncos franchise sold for a record-breaking amount, and initial estimates for possible upcoming sales of other high-profile sports teams highlight the unique value these ‘trophy’ assets can generate. In tandem, ongoing interest in sports gambling, data analytics and live content rights will continue to make this an acquisitive sector.
- Movies: Movie theatre attendance is taking longer to recover from the pandemic than other sub-sectors in the media space. The pandemic disrupted the established ‘rules’ around how movies are distributed and interrupted the overall production pipeline, reducing upcoming slates. With the growth in streaming services and use of alternative release-window strategies, business models are changing and a return to pre-pandemic theatre attendance may continue to lag. These institutional changes may usher in a new era of M&A, especially since the Paramount Consent Decrees were terminated in late 2020.
- Advertising: An ever-changing ad market that was disrupted by the pandemic and the rollout of AVOD will continue to drive innovation in ad-tech, engagement and measurement. Compelling new technologies poised to address the changing landscape will be attractive to major players looking to grow market position. Maintaining a competitive position and access to individual walled gardens could drive M&A, as companies look to scale their reach and customer pools through deals.
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Telecom
- Consolidation: Consolidation continues to be a theme in telecom. In the mobile segment, competition created by multiplayer markets incentivises capital deployment in network capabilities. The UK, Italy, Spain and Canada are candidates for further mobile-to-mobile consolidation. Fixed-to-mobile consolidation is also possible, particularly in Europe, as operators seek to benefit from network, customer and proposition synergies from their integrated fixed-to-mobile business model. Highly fragmented fibre markets will see consolidation as operators seek to reach scale and achieve rollout targets in competitive environments. Distress and constraints on access to capital could accelerate consolidation in the TowerCo sector, particularly as valuations soften further.
- Divestment: Given higher financing costs and significant capital expenditure demands, telcos will continue to divest non-core and asset-heavy divisions, allowing them to generate cash and deleverage. Mobile tower and data centre divestments will continue at a slower pace due to strategic acquirers’ valuation declines and increased financing costs. Established cable companies (CableCos) will seek to accelerate, de-risk and reduce cash demands from fibre to the premises (FTTP) rollouts through establishing JVs with providers of lower cost capital, albeit with caution. More broadly, telcos will look to monetise non-core IoT, media/content, advertising, and B2B information and communications technology (ICT) divisions through spinouts.
- Tech convergence: Telecom operators will seek to pivot towards higher-growth revenue streams through capability-driven M&A—with data analytics, cybersecurity and cloud segments all considered strong candidates for activity. For the US market, as average revenue per user (ARPU) and subscribers flatten, the competition between telcos and broadband providers will heat up as they encroach on one another’s territory. With broadband providers looking to bundle mobile services and telcos offering fixed wireless access (FWA) to the home, there is plenty at stake. Bolt-on deals (user interface and back-office infrastructure)—while not typically making the headlines—are necessary to ensure the underlying tech powering consumer and B2B solutions are best in class and will take place in 2023.
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Technology, Media & Telecommunications M&A 2023 outlook
The TMT sector is continually advancing and engineering new technologies, platforms and solutions to enhance capabilities across every industry. Sophisticated dealmakers appreciate these dynamics and will continue to engage in M&A that is accretive to their strategy and portfolio. While some may choose to sit on the sidelines during these times, those that have strong balance sheets and access to capital will be rewarded with opportunities to acquire incremental assets that can drive long-term growth and capabilities across sectors.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and as accessed on 2 January 2023. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under licence by Dealogic. Dealogic retains and reserves all rights in such licenced data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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Barry Jaber
Strategy&, Global Technology and Telecommunications Deals Leader, Partner, PwC United Kingdom
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