While Australia doesn’t have the mega deals of the US, plenty of interesting things are happening in Technology, Media and Telecommunications (TMT), thanks to a relaxing of media ownership legislation and a vibrant tech startup scene.
Across the Technology, Media and Telecommunications markets (TMT), there are plenty of deals underway in Australia, but they are generally small deals – in other words high volume, low value.
The media landscape will change due to the legislation change around media ownership at the end of 2017, which frees up opportunity. We could see some mergers between organisations that were not previously possible, such as people owning three forms of media in one region, or people looking to consolidate content and back office operations. Traditional media companies can now better compete with newer digital organisations.
The large telcos in Australia continue to look for deal opportunities as they adapt their business models in the face of disruption. There is also a lot of movement around the roll out of 5G which could lead to some change.
Some smaller telcos are merging with energy providers, sharing their customer bases to roll out new products.
Globally we will continue to see deals where telcos combine with media to extend the reach of content.
Internationally, the top companies today are technology companies – including Google, Apple and eBay.
In Australia we have a vibrant community here of smaller tech companies, trying to get traction and grow, and there are quite a few trying to list on the stock exchange. The values could be $50 million to $100 million, so they are relatively small compared to overseas counterparts.
We don’t have the maturity of the large overseas tech businesses, therefore it is about people looking to buy little ones, looking to get liquidity or money. The vendors and founders are looking to sell, and move on.
We expect the Technology and Telecommunications sector to continue its strong M&A performance in 2018, following another year of significant activity fuelled by a flurry of deal-making in the US during 2017.
According to the M&A Predictor, corporate appetite for M&A deals – as measured by forward P/E ratios – is expected to rise by 10 percent in the Technology sector versus 2017, while remaining flat in the Telecoms sector. The capacity of corporates to fund M&A growth – as measured by net debt/EBITDA – is expected to increase by 145 percent in Technology and by 7 percent in Telecoms.1
Activity during Q1 2018 for Technology, Media and Telecommunications (TMT) supports our outlook. The year got off to a strong start in Q1 with the total value of deals doubled to US$247 billion versus Q1 2017. Volume of deals in Q1 2018 was down 8 percent at 2,820 versus Q1 2017 and average deal size was US$87 million. "There's a lot of money sitting on the sidelines, a trend that has prevailed for the last few years," says Cyrus Lam, Global Technology Co-Lead.
"Every year, private equity funds report increases in reserves of 'dry powder' despite spending record amounts in the previous year on acquisitions. They seem to have an unending supply of capital. The low-interest-rate environment and abundant availability of debt
Over the past 5 years, private equity firms have become increasingly important buyers of Technology companies, both from a global and US perspective.
"Despite the continuing abundance of 'dry powder', whether private equity funds continue to have this impact in 2018 will partly be determined by what happens to interest rates – which are expected to rise in 2018 – and how new tax legislation will impact a private equity fund's deal economics," says Cyrus.
Cross-sector deals are expected to continue at a healthy pace as technology stalwarts attempt to disrupt traditional business models, while incumbent companies look to defend their business models and retain competitive advantages by acquiring technology.
"Anything that allows existing firms to differentiate their products or services from new competitors is the goal," says JP Ditty, Global Technology Co-Lead and Managing Director.
Adding that on cross-border deals, we can expect much ongoing interest being directed at US firms, primarily by global players in China, Japan and India. All of these countries appeared on KPMG's list of Top Countries for Deals in 2017 for TMT in our full report.
The sector in 2017 generally met expectations in 2017, with deal values and volume showing gains for the TMT sector.
The total value of deals in 2017 reached US$745 billion, compared to US$800 billion in 2016, while the number of 2017 deals increased to 12,297 from 10,787. Average deal size was lower at US$60.5 million versus US$74 million for 2017.
"Deal volumes and values were strong in 2017, with the US setting the pace amid a relatively flat global picture. We anticipate that trend continuing in 2018, with the US/North America setting the pace on the number and value of deals," Cyrus notes. "Overall technology deal activity in the first three quarters of 2017 lacked the blockbuster deals seen in 2016 but this changed in the fourth quarter with the announcement of large public transactions."
"Although PE investors are complaining about how expensive things are on the buy side," JP adds, "they love the prices that their companies are garnering on the sell side and are generally selling anything not nailed to the floor. With that said, you always need a willing buyer and seller to complete a transaction on both pricing and terms, so given the good volume, there is still equilibrium and this is expected to continue into 2018."