The companies transforming the world are pursuing deals to evolve and stay competitive.
The digitization of everything continues to reshape the world, driving continued evolution in how companies are run and the ways people work, play and consume media. At the center of these sweeping changes is the technology, media and telecommunications (TMT) sector.
Companies in the sector have engaged in a tsunami of mergers and acquisitions as they adapt to new demands, innovations and competitive pressures. The deals are taking place in all sectors and for businesses of all sizes, as some midsize companies merge with competitors to gain scale, while larger companies acquire disruptors rather than build from scratch.
In recent months, enterprises ranging from chipmakers to broadband providers have committed billions to building out new capacity and snapping up competitors to consolidate their leadership positions. In total, there were more than 2,000 TMT transactions equaling more than $240 billion just in the third quarter of 2021, bringing the year-to-date total to nearly 6,000 deals worth $1.9 trillion, according to KPMG.
Each deal puts new pressure on the rest of the field, leading to more consolidation and acquisitions.
"You have several trends driving M&A activity, including digitization, the migration of data to the cloud and a push for vertical integration. When one company makes changes, it can be a competitive threat to others in the space," says Kevin Khanna, head of corporate banking at Fifth Third Bank. "In response, they’re going to consolidate, seek capital to expand into growth areas and chase disruption."
There are a number of catalysts for deal activity across all sectors and for companies of all sizes. In some cases, it is faster and more cost-effective for a large company to buy an industry disruptor than to build the expertise internally. Likewise, consolidating middle market industry rivals could be the best approach to challenge a market leader.
Forces for Change
TMT companies are in the midst of a years-long push to digitize and automate much of their business processes, unlocking efficiencies and opening paths to new growth, says Bob Marcus, head of capital markets for Fifth Third Bank. "The drive toward digitization has been underway for some time, but the pandemic really accelerated those trends. Companies and private equity firms are looking to acquire and integrate new technology."
"When one company makes changes, it can be a competitive threat to others in the space. In response, they’re going to consolidate, seek capital to expand into growth areas and chase disruption." — Kevin Khanna, Head of Corporate Banking, Fifth Third Bank
To be sure, there are different motivations and strategies within the broad TMT space. Technology companies have been focused on vertical integration, acquiring promising technologies to fold into their business and expand their share of wallet. Media organizations meanwhile are dealing with secular changes in how content is distributed. To bolster profitability, these businesses are seeking greater scale through acquisitions.
In the telecom space, companies are seeing dramatic growth in demand. That’s compelled them to seek capital they can use to build out infrastructure to support these activities, from the rollout of 5G and new data centers to faster fiber-optic networks.
All of these trends are putting pressure on companies to make investments, and that is driving them to pursue deals and new capital. "Larger companies have made it through this unprecedented period and not just survived, but thrived," says Khanna. "Many of these companies feel emboldened to make major changes."
On the other side of the equation, there is a considerable amount of money on the sidelines with investors who are eager to take part in the dramatic changes in the sector. In fact, private equity firms went into 2021 with nearly $2 trillion of uninvested capital to deploy, according to a recent Fifth Third industry report.
Putting Capital to Work
Marcus says private equity is helping many companies achieve their growth goals. The bank recently worked with a private equity firm that invested in a regional U.S. telecom that had been family-owned for generations and possessed valuable but underutilized assets. While it had great potential for expansion, the company needed additional capital to retool the business and take advantage of growth opportunities.
After the private equity firm completed its investment, the telecom’s management team was able to accelerate capital deployment and hire additional talent, which has resulted in enhanced revenues and margins. The company has also completed several "tuck-in" acquisitions to expand its footprint. Fifth Third says it can guide companies through this process with its expertise and experience.
Technology, Media and Telecom Deal Activity Is Red Hot
"This is a phenomenon we have seen time and again, where we help companies access capital and they are able to create competitive advantages to unlock growth," says Kevin Lavender, head of commercial banking at Fifth Third Bank.
Even public companies that can access a variety of funding options face challenges. An advisor like Fifth Third can offer financial expertise to weigh the costs and benefits of issuing equity, using cash reserves or funding a deal through debt.
Looking ahead, many TMT companies will continue to seek capital, for which they must navigate a crowded marketplace of investors competing to put their capital to work. Put together, the ongoing demand plus steady supply suggests this wave of M&A activity will not slow anytime soon.
"We will continue to see consolidation and acquisitions," Khanna says. "There are a lot of investors that realize there is good money to be made, while the trends driving companies to seek capital have a long way to go." Learn more