Can your inorganic growth strategy adapt to the convergence era?

Play video
4 minute read 22 Feb 2019
By

US Americas

Multidisciplinary professional services organization

4 minute read 22 Feb 2019

Technology, media and entertainment, and telecom (TMT) companies’ business strategies are converging — and in flux.

TMT is transforming rapidly, amid great uncertainty, as relentless innovation powers the development of new services and business models while often creating faster or lower-cost ways of doing what’s possible today.

From 2014 through 2016, TMT M&A values soared, witnessing three straight years of more than 100 deals valued at over $1 billion — and 2017 just missed that level, with 95 $1 billion-plus deals.

The findings of EY’s 17th Capital Confidence Barometer, however, give us reason to be bullish about TMT M&A to come.

Deal value

US$2.7t

Aggregate value (2014-17)

Deal size

US$948m

Average size (2014–17)

Convergence along many dimensions

To paraphrase venture investor Marc Andreessen, technology companies are “eating” the world economy. But hang on: at the same time, the rest of the world wants to “eat” technology, too.

In addition to the trends driving overall TMT M&A, there are specific trends driving cross-sector convergence — both within and outside TMT. “There’s hardly a company left that doesn’t think technology is going to be core to their ability to succeed in the marketplace,” notes Clarence Mitchell, EY Global TMT Strategy Leader.

There’s hardly a company left that doesn’t think technology is going to be core to their ability to succeed in the marketplace.
Clarence Mitchell
Partner, Global Strategy Leader for TMT

Partnerships rising

As potential future business models multiply and evolve, complexity, convergence and the need for scale and speed to market are all accelerating each other. A wise TMT company needs more bets on the table than can be covered by M&A alone.

That’s why one of the clearest data points to emerge from our research is the rapid growth of strategic alliances and partnerships across all three TMT sectors. Beyond the data, however, EY has seen a qualitative change in the nature of TMT partnerships.

“Many past partnerships were looser affiliations,” says Mitchell. “Alliances today in TMT are frequently more significant and tightly integrated. Partners are sharing data, jointly developing products and offerings, and actively building ecosystems and platforms. There is more real operational integration between partners.”

Getting convergence right

TMT companies face a multitude of tough questions when evaluating convergence options:

  1. What types of technology and content would best complement our growth strategy?
  2. Where are the best acquisition and partnership opportunities? 
  3. What deals might head off disruption from below or orthogonal competition from out-of-sight? 
  4. Which offer the largest and fastest revenue growth? 
  5. Which lead to the best business model of the future? 
  6. How can we use new data assets in disruptive revenue-generating models?

These are hard questions with few clear answers. Even after determining the optimal strategic direction, TMT companies must then choose among a wide range of inorganic growth paths to achieve their convergence goals, from traditional M&A to incubation, corporate venturing and partnerships.

Divesting to grow

With advancing technology constantly making new things possible, company building is no longer a straight-line pursuit.

The same innovation driving TMT M&A and partnering virtually guarantees that TMT company business strategy will continue to change. Companies must continue to evaluate their portfolios to determine which assets will be accretive to their future ambitions and which will not.

Recent EY research reinforced this idea, finding that fast-growing TMT companies performed capital budgeting processes more often, compared with both slow-growing TMT companies and fast-growing non-TMT companies.
In short, in the era of convergence and technological disruption, TMT companies need to regularly review their portfolios and be willing to take bold action based on the findings of those reviews.

New thinking for the future

Technology-enabled disruption, business model uncertainty, record-high equity markets and cross-sector convergence are in the nature of the TMT industries today. You can’t escape them.

Venture investment is seeding thousands of start-ups driving ongoing cycles of disruptive technologies, while private equity sponsors play an increasingly significant role in the TMT M&A landscape. Success accrues so rapidly in the world of TMT that companies not first or second to any market, risk irrelevance.

Meanwhile, the uncertainties make decision-making, especially around very large capital allocation decisions such as M&A, very challenging, indeed. What is more, TMT M&A success today sometimes means discarding the old merger integration playbook. Driving deal value at this transformational time requires new thinking and new approaches.

Summary

Technology, media and entertainment, and telco companies can look to M&A and partnerships for that missing strategic link, to help them scale through consolidation, geographic expansion or convergence deals.

About this article

By

US Americas

Multidisciplinary professional services organization