TMT robust M&A outlook continues, but some companies pause dealmaking plans

Transformative deals continue, but TMT executives moderate near-term M&A plans amid regulatory headwinds and competition from PE buyers.

Though technology, media and entertainment, and telecommunications (TMT) executives expect the robust M&A market to continue, many have moderated their near-term dealmaking plans, according to our latest Capital Confidence Barometer. After the high levels of activity seen in recent quarters, fewer TMT companies (42%) now plan to actively pursue M&A in the next 12 months — down from 51% in April 2018 and slightly below the 44% long-term average across all sectors. Merger and acquisitions intentions trended lower within the technology and telecommunications sectors, and stayed roughly flat in media and entertainment.

Still, transformative deals continue — in fact, many serial acquirers have returned to the markets in the last few quarters. Notably, near-term M&A plans are much higher among companies with revenues over $1 billion (65%), which typically can allocate more resources to ongoing M&A activity, than for companies with revenues below $1 billion (23%). Fast-changing regulatory and political headwinds are causing some companies to pause their dealmaking and assess the potential impact and redouble lobbying efforts.

Market optimism remains high. Overall, TMT executives remain extremely positive about the M&A outlook, with 99% expecting the market to improve or remain stable over the next 12 months. That confidence is bolstered by strong economic indicators; the vast majority of executives believe that economic growth, corporate earnings, and equity valuations will improve or remain stable. The rationale for M&A is as compelling as ever: executives view dealmaking as the most effective way to quickly expand into new markets, adjust to changing customer behavior, and acquire key talent in a tight labor market. 

Geopolitical and regulatory challenges are top of mind

Trade tensions and regulatory scrutiny now represent some of the biggest risks to corporate growth as well as M&A, according to respondents. Executives listed regulatory and government interventions, protectionism and trade policy issues as the top causes of failed deals in the past year. And they don’t expect those challenges to disappear any time soon: 30% identified regulatory and political uncertainty as the biggest risk to business growth over the coming year, and 44% believed it would be the biggest risk to dealmaking. Some subsectors, such as semiconductors, are more vulnerable to government intervention than others. A clear understanding of new trade and regulatory policies will be required to succeed in this atmosphere of heightened uncertainty.

Planning post-deal integration is key to success when asset valuations are high

Facing high asset valuations and competition from other buyers, executives need robust M&A playbooks to achieve their corporate goals. Post-deal integration should be a pre-deal consideration, since a majority of executives (56%) achieved lower-than-expected synergies in their most recent deal. To more effectively capture synergies, 54% of companies are starting integrations earlier. Successfully quantifying and planning synergies — in areas including cost, revenue, taxation and technology capabilities — allows buyers to bid with confidence in a competitive deal environment.

Media & Entertainment Capital Confidence Barometer

Strong confidence in M&A environment continues, although policy concerns and buyer competition deter some deals.

The latest Media & Entertainment Capital Confidence Barometer reveals that media & entertainment (M&E) executives remain strongly positive about the dealmaking environment, with 100% expecting the already buoyant M&A market to improve or remain stable in the next 12 months.

Underpinning this enthusiasm is confidence in the performance of the capital markets: an overwhelming majority (over 95%) of executives believe corporate earnings, credit availability and equity valuations will improve or remain stable in the year ahead.

Deal discipline rules the day

Despite their confidence, executives are maintaining deal discipline. Among M&E executives, 42% expect to actively pursue M&A in the next 12 months, a drop from 50% a year ago and below the 46% long-term average (since 2010). This moderation is understandable, given the recent significant level of deals both in terms of volume and value. The M&A appetite remains much higher among mid-sized and large players, which are better equipped to execute transactions on a continuing basis: 69% of those companies plan to pursue deals, up from 55% six months ago. This appetite reflects the need to build scale, acquire critical content and capabilities, and rapidly innovate as disruptive forces transform the sector.

Regulatory and policy headwinds threaten some deals

At the same time, policy headwinds and deal competition are causing executives to walk away from some transactions. Almost all respondents (94%) cancelled or failed to complete a deal in the past 12 months – up from 75% six months ago. In almost half of those cases (48%), concerns about regulatory, policy and antitrust interventions were the primary factor. The next-biggest cause of deal failures was competition from other buyers or disagreement on price. Over the next year, 83% of respondents expect that private capital will increasingly drive competition for acquisitions. 

Synergy challenges create obstacles to unlocking deal value

After the significant increase in M&A activity of the last few years, many companies are focusing in the near term on integrating and capturing value from their recent acquisitions. Some continue to face challenges. Nearly half (46%) of companies failed to meet synergy targets for their most recent deal – a high potential cost when those synergies represent 21-30% of total deal value in a majority (53%) of cases. Executives said their biggest challenge is onboarding and retaining talent, which is a key part of the rationale for entertainment deals. M&E companies are also accelerating their portfolio review process in response to ongoing sector disruption and policy uncertainty. Nearly a quarter (23%) of companies now review their portfolios quarterly, and 100% conduct reviews at least once a year. In 71% of cases, those reviews identified potential divestments: assets that were underperforming or threatened by disruption.

Telecommunications Capital Confidence Barometer

Telecom M&A outlook remains positive, but regulatory issues and deal competition loom large.

Telecoms executives remain confident about the sector’s M&A fundamentals, according to our 19th Telecommunications Capital Confidence Barometer. More than three-quarters (76%) of executives believe the telecommunications (telecom) M&A market will improve over the next 12 months, and 62% expect improvement in the sector’s economy — a significant increase from 45% in our April survey.

Though executives’ near-term dealmaking intentions have dipped below recent record highs, 62% of larger telecom companies (with annual revenues over $3 billion) plan to actively pursue acquisitions in the next 12 months. Convergence and consolidation continue to drive the M&A agenda for many telecom companies, as underlined by several recent megadeals.

Executives’ positive sector view is supported by their confidence in the global economy — 75% expect the global economy to improve, while only 1% predict a decline. However, Brexit remains a key source of global anxiety: more than half of respondents believe Brexit will negatively impact their investment and acquisition activity not only within the UK, but also across the EU and in other regions.

Disruption and regulatory risks pose the biggest threats

Telecom executives continue to view disruption as the biggest threat to their core business — but regulatory and political risks now rank a close second. Regulatory and government issues were also the biggest cause of failed deals over the past year and are seen as the top threat to future deal-making, cited by 47% of executives. Overall, 94% of telecoms companies failed to complete an acquisition during the last 12 months, up from 73% in April. In addition, sector executives face rising competition for acquisition targets, driven primarily by private equity and corporate investment funds and their appetite for infrastructure assets.

More-frequent portfolio reviews accelerate the response to disruptive forces

How are telecom executives responding to the increasingly complex M&A environment? Many are reviewing portfolios more frequently to sharpen their focus on core activities and shed non-core assets; 75% of companies now conduct reviews at least every six months, and those reviews most commonly result in divesting assets that are underperforming or facing disruption risks.

Executives also continue to face challenges capturing synergies from their acquisitions, with 50% achieving lower-than-expected synergies from their most recent deal. Many are starting integration earlier as they seek to increase synergy capture. The integration challenges are headed by talent onboarding and retention, which are often exacerbated by reskilling initiatives already underway at the acquiring company.