Technology, media, telecoms: TMT is the most promising sector
Posted on Sep 8, 2014
Consolidation of network carriers in Europe, pressure from Chinese component manufacturers, large-scale maneuvers in Silicon Valley; the technology, media and telecoms sector (TMT) has had a busy 2013 and all systems are go for the continuance of mergers and acquisitions.
The Comcast offer for TimeWarner (68.5 billion dollars), the acquisition of Directv by AT&T (65.5 billion) and that of WhatsApp by Facebook (16 billion) are among the five biggest worldwide merger-acquisition deals during the first half of 2014 and they are all in the TMT sector. This is no coincidence since, the world of technology is evolving at a rapid pace and this is felt through big merger-acquisition maneuvers. In 2013 alone, the volume of operations rose by more than 64%, from 331 billion dollars in 2012 to more than 511 billion in 2013. The many acquisitions enable worldwide groups to gain market share while technology improves. When the knowhow or funds to engage in big R&D programs are not available internally, it is sometimes more efficient, quicker and above all less expensive to acquire a technology. Carlos Ferro, financial director of ST Microelectronics, confirms that “transatlantic or regional mergers are possible”. He warns against hasty acquisitions - “what matters most is a perfect strategic agreement between the parties; in the end this is what will produce the best competitive advantage in a global market in the end”.
Obligatory consolidation between European carriers
With more than 140 cell phone carriers in Europe against four in the United States and three in China, Europe has no choice but to consolidate. The European Commission has understood this and is now calling for more concentration and thereby a decrease in the number of carriers in Europe to compete with external rivals which are increasingly attacking the European market. The first signal is that the European Commissioner for the Digital Agenda, Neelie Kroes, is hoping for a simpler regulatory framework. The carriers should no longer need more than one single authorization to operate across all twenty eight states. Another important sign is the green light from the European Commission for the purchase of E-plus by Telefonica in Germany. Brussels is pushing ahead with best practices in terms of consolidation.
The Asian IT breakthrough
Chinese high-tech manufacturers are implementing a ferocious acquisition policy to conquer new markets. As early as 2005 Lenovo had acquired the personal IT division (Thinkpad) of IBM, and 2014 marks the resumption of acquisitions by the Chinese group which, a month ago, concluded the purchase of Motorola Mobility from Google (2.91 billion dollars) and became the buyer of the IBM entry range servers business for 2.3 billion dollars. Yang Yuangqin, managing director of the group emphasized that “over the short term [the acquisitions] will have a negative impact on performance”, but for him it is a question of refocusing the group’s strategy on mobile tools to deal with the loss of dynamism in PC sales and to manage the transition towards digital terminals. In this way Lenovo has made a notable entry into the club of the five leading makers of smartphones, where Apple alone is standing firm against Asian manufacturers.
Less call for investment bankers
With Google, Facebook, Oracle or even Apple, Silicon Valley businesses are increasingly ready to do without the advice of investment banks for their M&A operations, which could spell bad news for investment bankers. According to a study by Dealogic in the USA covering deals of more than one hundred million dollars carried out in the technology sector, 69% of businesses have acted without their bankers, against 27% in 2004. In 2013, the acquisition of the Waze application by Google for 1.15 billion dollars was done without an investment bank, just like the purchase of Beats Electronics by Apple this year.
But without the banks studying income, cash flow and sales, how do buyers evaluate their targets? The reply from Larry Page is simple: he favors a product approach rather than a financial analysis. This is what the Internet guru calls the “tooth brush test”. Like a tooth brush, consumers must need to use the product marketed by the firm at least twice a day. So why do we need bankers? “Their advisers only arrive at the second stage”, explains Donald Harrison, Google’s vice-president. Luckily for them, this tendency should only concern deals involving start-ups. Their abilities in financial evaluation and negotiation are still appreciated by the more mature companies.