When will Australia see true convergence in TMT?

Wednesday, 4 July 2018

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EY’s 18th Capital Confidence Barometer finds the world’s technology, media / entertainment and telecommunications (TMT) companies converging – and in flux.

More than half (56%) of global TMT respondents said they intend to pursue acquisitions in the coming year. Around three-quarters of technology and media and entertainment companies reported they had identified an “at-risk” or underperforming asset to divest during their most recent portfolio review. In Australia, TMT companies (telcos, newspapers, magazines, telecom and television) have been weighing up divesting their non-core assets in another round of industry consolidation and speed is of the essence: 95% of local executives are looking to achieve their divestment and acquisition objectives in the next 12 months.

Widescale industry consolidation

But according to Ishwar Madhyastha, EY Oceania Lead Transaction Advisory Services - TMT, “Most of these deals have been driving industry consolidation – not convergence.”

“Local media and entertainment (M&E) companies are either shedding businesses that no longer fit in core strategy or are making ‘synergistic’ acquisitions to extend the lifespan of their assets.”

Looking at the next six months, Madhyastha expects to see more media consolidation.

“This will push smaller firms towards value chain niches and see large M&E companies seeking even greater scale, deeper customer knowledge and comprehensive end-to-end solutions,” he said.

“We have seen this already occurring with global media companies, using local acquisitions as the gateway for new on demand services. At the same time, traditional media businesses, including magazines and outdoor advertising, will continue to shuffle assets quickly to gain synergies from their existing portfolios.”

Meanwhile, as new entrants threaten to shake up the market, telcos are looking to strengthen their balance sheets by rationalising their infrastructure asset portfolios. Data centres, telecom towers and satellite businesses are much sought after by long-term investors like sovereign wealth and superannuation funds.

Deal intentions in technology also remain above average. The listed sector transaction activity is largely targeted at reducing costs and increasing margins, with unlisted companies changing their business models to suit the current environment.

Cross sector convergence coming soon

Despite the current focus on consolidation, within the next 12 months, Madhyastha anticipates transactions will once more begin to focus on the convergence of content and distribution. “Technology has made it possible to facilitate convergent offerings. Whilst customers are no longer bound by the traditional linear value chain, they can directly access content producers, aggregators and distributors, helping to drive convergence deals.”

“For example, as mobile technology continues along its S curve, we will see increasing pressure for convergence among M&E and telcos. The attempted media/telco merger in New Zealand will not be the last. If regulators don’t come to the party, we can expect the rapid growth of tightly integrated strategic alliances and partnerships across the TMT sector, where partners share data, jointly develop products and offerings, and co-build ecosystems and platforms.”

“I also expect tech companies with large content appetites to target M&E acquisitions and appropriate telco customer demand with apps and services,” he said.

Transformational acquisitions on the 2019 agenda

The relentless pace of technology and business model disruption now requires M&A to be a continuous and ongoing element of any effective TMT strategy.

“Next year, we will see larger-scale acquisitions that will help TMT companies to achieve immediate growth by targeting incumbents in adjacent industries that can extend from, or leverage, the buyer’s core business or infrastructure, complementing existing revenue models.”

“We will also see acquisitions of start-ups to position for anticipated future high-growth markets. These will likely be targets with strategic technology elements, disruptive digital business models, hard-to-find talent or some a combination of the three. Consolidation may have run its course – bring on convergence!”

Read more in the latest Capital Confidence Barometer:

https://www.ey.com/gl/en/industries/media---entertainment/ey-capital-confidence-barometer)
https://www.ey.com/gl/en/industries/technology/ey-capital-confidence-barometer)
https://www.ey.com/gl/en/industries/telecommunications/ey-capital-confidence-barometer)

Notes to Editors

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About EY Transaction Advisory Services

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About EY Global Capital Confidence Barometer

EY Global Capital Confidence Barometer is a biannual survey compiled by Euromoney Institutional Investor Thought Leadership of more than 2,500 senior executives from large companies around the world and across industry sectors. This is the 18th biannual CCB in the series, which began in November 2009; respondents for the 18th edition were surveyed in March and April 2018. Respondents represented 14 industries, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. The objective of the Global Capital Confidence Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve. ey.com/ccb #EYCCB