M&A trends in technology, media, and telecommunications: 2023 mid-year update

The technology, media, and telecommunications (TMT) sector is experiencing rapid transformation due to emerging technologies and shifting consumer preferences. At the same time, the sector’s steady growth makes it an attractive area for investment and M&A activity in the medium and long term. The focus on digitalisation stems from businesses’ endeavours to adapt, reshape, and evolve in the face of fluctuating market conditions and the introduction of new technologies, such as artificial intelligence (AI).

In the short term, M&A activity in the TMT industry reflects global dealmaking challenges, including capital constraints, rising interest rates, geopolitical shifts, and stringent regulatory requirements. These elements influenced TMT M&A deal metrics in the first half of 2023, and the second half could see comparable trends. We expect current valuations to provide additional strategic and opportunistic deal opportunities.

Dealmakers may target companies in need of capital or with value-enhancing technologies. Expensive capital may lead to more joint ventures and partnerships in M&A. Infrastructure technologies influenced by consumer demand are trending, especially in the TMT sector, including generative AI, software, semiconductors, and gaming innovations. While companies with strong balance sheets can seize opportunities and innovate, those with capital constraints may struggle. PE houses continue to play an important role in TMT M&A, attracted by the sector’s high-margin, cash-rich business models.

Key issues driving M&A in tech, media, and telecoms

Technology sector

Recently, AI has gained prominence as a potential game-changer for productivity and market expansion. OpenAI’s launch of ChatGPT in 2022 and GPT4 in 2023 showcases the potential of large language models. This AI surge is anticipated to boost M&A activity in the tech sector, not just in AI-specific firms, as companies prepare for an AI-driven technological growth phase.

Software’s subscription-based business models, which offer consistent revenues, continue to draw investor interest, especially in a slower growth climate. Software deals are predicted to represent over 70 percent of technology deals in 2023, continuing a trend from the first half of the year. Private equity interest in software is strong, with significant public-to-private deals such as Thoma Bravo’s acquisition of Coupa Software ($8bn, closed in February 2023) and the proposed acquisitions of Qualtrics and Cvent, showcasing PE’s sustained enthusiasm for big software deals.

IT services, especially cybersecurity, DevOps, and digital transformation, are seeing growth due to increased digitalisation and security concerns, ranking second in tech deal volumes after software. In the first half of 2023, US tech firms notably sought Israeli companies to enhance their cybersecurity capabilities. In addition, the potential of steady revenues from managed services has made IT services companies more attractive to dealmakers.

In the first half of 2023, semiconductor deals were limited due to regulatory constraints, but chip demand remains robust because of their importance in current and upcoming technologies. Generative AI could further boost this demand. While major cross-border semiconductor deals may face challenges in 2023, investor interest is anticipated to grow, especially with the support of the CHIPS for America Act and the FABS (Facilitating American-Built Semiconductors) Act, prompting more US investment in chip production.

Media and entertainment

The streaming ecosystem faces heightened pressure to prove ROI due to intense competition and content acquisition costs. Investors will closely examine businesses’ sustainability plans, pushing companies to innovate in attracting subscribers, diversifying revenue, and cutting costs. The Writers Guild of America (WGA) strike will impact both US and international streaming companies. Previous strikes led to increased unscripted content; however, a prolonged strike today might boost foreign production and content popularity in the US, as seen with “Squid Game” and “Fauda”. With the ongoing strike, M&A activity may slow as investors assess its effects on streamers’ profitability. In the longer run, we expect the fragmented streaming market to see consolidation-driven deal activity.

The video game sector, having seen numerous deals in the first half of 2023, is predicted to stay active for the year. As one of the fastest-growing areas in media and entertainment, it draws dealmakers’ attention due to the increasing demand for cross-platform interactivity. Video games allow companies to enhance content, broaden IP, monetise advertising in enclosed ecosystems, and align with metaverse trends.

Investors are keen on sports and live entertainment due to rising demand and technological advancements. Early in the year, strategic moves like Playtech’s stake in Hard Rock Digital occurred, and investors showed interest in major sports teams. The growing appeal of live entertainment and the shift in consumer preferences towards experiences bode well for future investment in this sector, provided the economy remains stable.

Telecommunications

Telecoms consolidation is expected to persist, but it might decelerate in the coming months due to a focus on debt reduction amid rising interest rates. In the first half of 2023, the telecoms sector saw a 6 percent decrease in deal volumes and a 65 percent drop in values, largely because of economic headwinds and a lack of megadeals. Notable deals included Rogers Communications’ acquisition of Shaw Communications and Vodafone’s sale of a stake to Altice in their FibreCo joint venture in Germany.

Digital infrastructure asset divestitures, especially cell tower and fibre assets, are anticipated to continue through the second half of 2023. After significant M&A activity in 2022, this trend extended into 2023, highlighted by EQT and PSP Investments’ proposed $3bn acquisition of Radius Global Infrastructure. Continued deals in this sector are likely, but financing costs and availability might affect the timing of asset sales.

We expect that telecom operators seeking tech convergence will continue their efforts to shift towards more lucrative revenue sources by targeting acquisitions that enhance both front-end and back-office capabilities. Areas such as data analytics, cybersecurity, and cloud services are likely to see sustained M&A interest.

And what about M&A in the Swiss TMT industry?

While the global and European (–2 percent yoy) markets saw a minor reduction in TMT-related M&A activity in the first half of 2023 compared to the same period last year, the Swiss market showed continued resilience with M&A activity involving Swiss TMT companies up by 23 percent (vs. H1 2022) and recording the strongest quarter ever in the first three months of the year. Benefitting from lower inflationary pressures and an overall better macroeconomic environment than many neighbouring countries, the Swiss market saw a record number of 170 transactions involving TMT target companies over the past 12 months. 

As in prior periods, transactions involving software companies formed the backbone of Swiss TMT M&A deal activity, again accounting for approx. two-thirds of all TMT deals, with IT services businesses – as the next biggest driver – accounting for 12 percent of transactions. Overall, technology in “TMT” remains king in the deals space in Switzerland, with more than 90 percent of all TMT M&A activity related to technology assets. With valuation levels currently trending below historical averages across TMT sub-sectors, software companies remain attractive M&A candidates, particularly in the cloud, analytics, collaboration, artificial intelligence, and security sectors, supported by stable growth fundamentals, attractive business models, and room for consolidation. As a result, we expect the software space to continue driving TMT M&A activity in Switzerland during the second half of 2023.

Continuing the trend of previous years and contributing significantly to deal activity, private equity and financial investors accounted for two-thirds of all transactions in the first half of 2023 in the Swiss TMT M&A space. This figure is up from just 20 percent in 2018 and even slightly higher than what we observed on a global level for the same period. While the transaction share of private equity players in all other non-TMT sectors in Switzerland also increased in the first half of the year, the 46 percent share is well below what we observe in the TMT industry and underlines the special attraction of the TMT industry for financial investors. And while the level of dry powder held by private equity funds saw consecutive reductions since the end of 2020, the funds available for buy-outs have again reached record levels, leading us to expect continued deal activity from this buyer group in the coming months. 

As in prior periods, non-Swiss buyers retain a key role in driving M&A activity in Switzerland, with more than 60 percent of all TMT assets acquired by a foreign buyer. While this share is down from almost 70 percent in the first half of 2022, it remains significantly above all other non-TMT sectors, which on average saw an equal share of targets going to Swiss and non-Swiss acquirers.  This continues to highlight the attractiveness of Swiss TMT assets for foreign buyers and the generally more international perspective of the sector compared to other more inward-looking industries.

Similarly, non-TMT buyers continue to drive the appetite for transactions in the TMT sector, with 80 percent of all transactions completed in Switzerland involving TMT targets in the first half of the year going to a non-TMT buyer. This compared to all other sectors, where the majority of transactions saw a buyer from the same sector in Switzerland over the same period. This trend of sector-foreign buyers in the TMT market has continued to grow in recent years, and given the ongoing need for companies to innovate and drive digitalisation, we expect non-TMT buyers to continue to turn to TMT assets for precisely these reasons. 

M&A in tech, media, and telecoms: outlook for the remainder of 2023

Despite the challenges of capital constraints and geopolitical issues, TMT remains the leading sector for M&A activity. There are still strategic opportunities for capital investment. Companies with robust financial health can take advantage of opportunities to differentiate themselves by enhancing their technical capabilities and fostering innovation. Conversely, companies with more limited capital may face more obstacles. PE firms continue to be drawn to the TMT sector, attracted by its high profit margins and steady cash flow.

In Switzerland, we expect the TMT sector to remain the main engine for deal activity.   

After a swinging start to the year, overall Swiss economic growth has slowed significantly and is expected to remain below 2 percent over the next 18 months. While this will also have an impact on the TMT sector, we expect the historical resilience and strong macro trends underpinning the industry to sustain growth and deal activity in the sector, outperforming other, more impacted sectors.

However, similar to other European countries, the Swiss deal market experienced an unusually slow summer, with deals being postponed and delayed, also in the TMT space. For this reason, we expect a dip in announced transactions in the third quarter, but would see deal activity to pick up again in the fourth quarter, as dealmakers returnto their desks. 

Last but not least, we may see more minority and/or alternative investment structures that will allow sellers and buyers to realise value in times of rising interest rates, helping sellers to take money off the table and support growth through investments. 

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