Despite the fact that Covid-19 has slowed deals activity in the short term, in the longer term many sectors in the technology, media and telecommunications space will emerge from the pandemic as winners. Without new drastic Covid-related lockdowns, we expect M&A activity to continue to recover through the rest of 2020. PwC’s recently published global M&A insights are also reflected in what we’re seeing in Switzerland.
As the pandemic has forced us to adopt new habits in our work, rest and play, the impact of Covid-19 on the technology, media and telecommunications industry has been closely mirrored by its impact on our everyday lives. With so many of us working from home, digital collaboration and communication technologies have hit the mainstream – increasing our appetite for bandwidth in the process. Unable to go to the cinema, we’ve been streaming and gaming to our hearts’ content – but at the same time we’ve been cancelling our subscriptions to sports channels for the simple reason that there have been no live sports. With restaurants out of bounds, we’ve been ordering food deliveries by app. Shopping online has been safer and more pleasant than wearing a face mask to visit the high street stores; and with the hospital or doctor’s surgery a potential hotspot, we’ve been increasingly likely to resort to virtual consultations and telehealth.
It therefore comes as no surprise that there have been winners and losers in the TMT space. So while we’ve seen a slowing in mergers and acquisitions in recent months as companies have focused on capital preservation, a new wave of deals activity looks set to emerge from the shake-up.
Technology: the big and strong will get bigger and stronger
Companies in areas such as cloud, SaaS and security that were performing well before the pandemic have benefited from social distancing and remote working, and valuations are rocketing. While this could fuel more M&A activity, the growing premium of cloud companies over non-cloud technology businesses may reduce deals as the route to the cloud. While large tech companies have seen advertising revenues suffer, they have also had the cash to weather the storm – and may soon be using these reserves to acquire smaller and weaker competitors. Because of changes in the way we work and consume, e-commerce, streaming and telehealth have all gained prominence. This means that more traditional operators may soon be seeking to get online capabilities through acquisitions. The fact that internet connections tend to be on the slow side in Europe means that 5G and fibre broadband are likely to take off as people literally try to get up to speed.
Media and entertainment: forced into a radical rethink to survive
Social distancing has brought the TV and movie industries to a halt. So while providers channelling content directly to consumers have seen a boom, other parts of the industry are having to completely rethink the way they produce and distribute content – a paradigm shift that could be permanent. Given the lack of live ’physical’ sports during the pandemic, e-sports continue to gain acceptance. But the biggest winners in media and entertainment have been video games makers, which should therefore see increasing M&A activity.
Telecommunications: increasing M&A activity with the goal of enlarging network capacity
The pandemic has boosted the need for digital infrastructure and bandwidth to accommodate networking connectivity. US telcos will be shedding assets to concentrate on their existing networks, focusing on core business and investing in additional capabilities in fibre and servers. As already mentioned, the European industry will be driven by a need for greater 5G and fibre broadband capacity. In addition, remote working will reinforce demand for business telecommunications suites bundled with network security – so expect to see acquisitions and partnerships in this field. Asia-Pacific will experience increased M&A activity, including cross-border deals in India, as investors seek new areas of growth. Major telcos in China continue to invest in 5G.
This is a time of great opportunity for players in the right areas of the TMT sector, so there’s plenty of potential for deals worldwide in the next few months.
What about M&A in the Swiss TMT sector?
The picture in Switzerland largely reflects the global trends. We saw a major slowdown in M&A activity as the Covid-19 pandemic started spreading in early 2020. Several sectors across TMT were negatively impacted, prompting companies to focus strongly on internal cash preservation and operational optimisation. As a result, a number of ongoing M&A processes were cancelled or put on the back burner until the situation has stabilised. The deal volume decreased to 16 in Q2'20, compared with an average of 25 since Q1'18 (-36%). However, the deal volume bounced back in Q3'20 for all TMT sectors as the confinement measures were progressively lifted.
Despite the uncertain overall economic situation, Switzerland’s TMT sector saw two major transactions with an enterprise value above USD 5 billion in the first three quarters of 2020. In August, Liberty Global/UPC announced the acquisition of Sunrise for approximately USD 7.3 billion, closing a chapter which started in early 2019 with Sunrise’s attempted acquisition of UPC. This deal creates a stronger competitor to market leader Swisscom, and highlights a global trend which has seen many telecom companies bringing broadband and mobile assets together.
“Covid-19 has been a remarkable ride for many players in the TMT space, with dramatic ups matched by equally dramatic downs. It’s going to take deals to level things out again.”
Earlier this year, in February 2020, Veaam Software Group, a leading backup solutions provider delivering cloud data management, was acquired by Insight Partners at a deal value of approximately USD 5 billion. This transaction illustrates not only the attractiveness of the tech sector at a time when ‘all digital’ is becoming the norm and many tech companies are seeking funding to fuel product development and accelerate international growth. It also shows the importance of private equity (PE) firms for the Swiss TMT market. PE firms entered 2020 with an unprecedented level of funds available and have been looking for investment opportunities, particularly in the tech sector. The share of total TMT deal volume involving PEs or PE-backed companies in Switzerland has increased from roughly 20% in FY18 to almost 50% in Q2'20 and Q3'20. These transactions have included the acquisition of Appway AG, a software publisher for wealth managers, by Summit Partners, and the acquisition of Scandit AG, a software publisher specialised in barcode scanning, by an investor group including Kreos Capital and NGP Capital.
Looking ahead, M&A activity in the Swiss TMT market will continue to depend on the evolution of Covid-19. However − as has become evident in the last three months − all actors are eager to resume deal-making and make up for lost time as soon as the situation normalises. It’s not a matter of ‘if’, but ‘when’.
To summarise: every cloud has a silver lining
In no area of the global economy have the effects of Covid-19 varied more widely than in technology, media and telecommunications. While the pandemic has jeopardised the very existence of certain segments of TMT, forcing them to fundamentally rethink to survive, other areas have been lent wings by the pandemic. In an environment of such clear winners and losers, there’s obviously rich potential for deals. Anyone able to adopt a structured value creation methodology to identify the drivers of value created or lost through Covid-19 is ideally placed to tap this potential.