Consolidation in the TMT space – a deal too far?


Financier Worldwide Magazine

January 2017 Issue

January 2017 Issue

Looming large among the major happenings within the technology, media & telecommunications (TMT) industry in 2016 was consolidation – a trend driven by high-profile mergers and acquisitions (M&A), both mega and middle market, culminating in the blockbuster $85bn AT&T/Time Warner transaction.

Highlighting many of the transactions which took place over the past 12 months is Mergermarket’s ‘TMT trend report Q1 – Q3 2016’; an overview of activity in the industry which analyses deals on a region by region basis, as well as examining the factors which made them happen and drove them to completion. The report shows that Q3 saw 666 deals worth $179.6bn, a 39 percent climb in value compared to Q3 2015, which saw 828 deals worth $128.8bn. M&A activity picked up sharply following a relatively weak H1 2016, with deal value experiencing two consecutive quarterly increases. Also, the deals seen in Q3 2016 made the quarter the second strongest in value behind Q3 2013, which saw 619 deals worth $229.8bn.

Moreover, the analysis anticipates that TMT activity would be largely unpredictable for the remainder of 2016, with uncertain economic conditions and the fallout from the US presidential election likely to curb activity to a certain extent. In addition, it forecasts that China will step up its global acquisition agenda and target both Western technology and media players.

Providing further commentary on TMT industry deal activity in 2016 is Gartner’s ‘Market Trends: CSPs Continue to Diversify Into Adjacent Markets, 2016’ report which reveals that communications service providers (CSPs) seeking to diversify and generate revenue are increasingly looking to adjacent markets for potential acquisitions, such as information and communication technology, cloud infrastructure, and TV-related and content media companies.

In terms of overall deal value, according to Mergermarket there were 2489 global TMT deals with a total value of $621.55bn (excluding lapsed and withdrawn bids) agreed between 1 January 2016 and mid-November – a staggering amount of consolidation activity.

Yet for all the consolidation in the TMT space last year, such activities were not without criticism. Having witnessed a series of high-value transactions over the course of the year, numerous regulators, politicians and analysts lined up to voice their concerns as to the size and frequency of the deals being struck. With the announcement of the AT&T/Time Warner merger proving to be something of a tipping point for those expressing concern, the fundamental question is this: given the voracious appetite for consolidation displayed by the TMT industry in 2016, how much more consolidating can we expect in 2017 and beyond?


According to Mergermarket, four out of the top five TMT deals were announced during Q3. The biggest – the AT&T/Time Warner transaction – was announced in October. Other notable deals included SoftBank Group’s $30.2bn acquisition of ARM, Europe’s largest electronic chip-maker, Analog Devices Inc’s $12.9bn takeover of Linear Technology Corporation, Hewlett Packard Enterprise Company’s $8.8bn bid to acquire Micro Focus International Plc, Oracle Corporation’s $8.7bn acquisition of NetSuite Inc, and Tencent Holdings Ltd’s bid to acquire an 84.3 percent stake in Supercell Oy SoftBank Group Corp for $8.6bn.

Going forward, the appetite for consolidation activity in the TMT space will remain strong and the deployment of vertical integration as a corporate strategy will continue.

In addition, alongside the mega deals, a significant number of middle market transactions were completed, which served to drive the overall uptick in activity. Those that proved particularly notable during 2016 were Dalian Wanda Group’s acquisition of Dick Clark Productions Inc, Alibaba Group Holding Ltd’s move to acquire the Lazada Group, and General Motors Company’s acquisition of Cruise Automation – all $1bn transactions.

Vertical integration

Drilling down further into recent TMT consolidation activity, one corporate strategy being readily deployed is vertical integration, with Verizon and AT&T among those exercising this particular approach.

“There has been a strong move toward vertical integration in 2016,” confirms Paul Wissmann, national sector leader for KPMG LLP’s Media and Telecommunications practice. “OTT (over-the-top) and mobility have created threats to many established business models and practices. In order to react to these trends, companies are trying to vertically integrate and protect their position in the changing environment. In addition to that, we are seeing a significant amount of M&A activity surrounding the acquisition of technology.”

One reason for the uptick in vertical integration by large, global network service providers is that they are facing slowdowns in their core wired and wireless businesses, according to Bill Menezes, a principal research analyst at Gartner Research. “Both AT&T and Verizon, for example, have acquired targets that add capabilities essential to the monetisation of content on their broadband and cellular networks,” he explains. “In AT&T’s case, DirecTV added a multinational distribution channel direct to home satellite in North and Latin America and large-scale content distribution rights with major content producers, such as the movie studios and professional sports leagues. Time Warner would add content creation plus a revenue stream from content licensing to other providers such as cable operators and rival network service providers, as well as over the top streaming services such as Netflix.”

AT&T/Time Warner

The deal that has prompted calls for the TMT industry consolidation trend to be closely examined is telecommunications conglomerate AT&T’s acquisition of media giant Time Warner, which owns CNN and HBO. Immediately upon its announcement on 22 October 2016, the proposed deal was met with a chorus of disapproval. Questions as to the legitimacy of the transaction arose quickly from US lawmakers and presidential candidates, among many others. The deal also drew scrutiny from regulators, with a Senate subcommittee being scheduled to “carefully examine” the merger for any “significant” antitrust issues it may raise.

Assigning even odds of regulatory approval for the AT&T/Time Warner deal are senior research analyst Craig Moffett, and media analyst and partner Michael Nathanson, at MoffettNathanson LLC. In their analysis of the proposed transaction ‘AT&T and Time Warner: Vertically Challenged…’ (October 2016), the absence of a counter-bidder means that only the regulatory uncertainties of the deal are left. Moffett and Nathanson also note that AT&T is expecting the review of the deal to take more than 12 months – plenty of time for a counter-bidder to emerge.

“If regulators allow the AT&T/Time Warner merger to go ahead, you would expect others to try a deal along similar lines, just like these two have done following the Comcast/NBCUniversal deal transaction,” suggests Yining Su, a TMT specialist at Mergermarket. “In fact, this year alone telecommunications companies have acquired nine US media firms, the highest year-to-date count we have recorded. So consolidation is already kicking ahead. An interesting data point here is that deals in the US telecoms and media space are getting larger. Indeed, our data shows the average deal size in the sector in 2016 year-to-date is $1.49bn. This has been rising steadily from $401m five years ago in 2011.”

Examining the mechanics of the proposed AT&T/Time Warner merger and the driving factors behind it, Ms Su is fully aware that those who own the rights to content have long sought ways in which to fully maximise the value of that content. “Content rights holders have been seeking ways to directly access consumers for years,” she says. “On the one side of the deal, the NFL allows subscribers to its Game Pass service to watch season games, while HBO launched a standalone streaming service last year, called HBO Now. On the other side, telecoms operators have reached market saturation and are worried about cord-cutters and being reduced to merely being ‘dumb pipes’ for content to pass through that they do not own. Throw Netflix and Amazon into the mix and the established players are looking at how to respond.”

Having highlighted the pros and cons of the deal, it should also be noted that if recently elected president Trump makes good on his promise to block the transaction, then ‘all bets are off’. It has also been suggested that Trump’s victory could even threaten the five-year-old Comcast/NBCUniversal deal. However, opinion of course varies as to how seriously one should take many of Mr Trump’s statements.

A deal too far?

Clearly, much of the initial reaction to the AT&T/Time Warner deal centred on the size of the transaction as well as the frequency of such deals, with many suggesting that the TMT industry had gone too far with its consolidation activities and needs to be reined in.

“These businesses have undergone cycles of consolidation and then de-consolidation for decades,” notes Mr Menezes. “Remember that in the past 22 years AT&T has bought a nationwide wireless company, spun the company off, seen the company acquired and then re-acquired the company when AT&T merged with SBC to assume its present form. Pre-SBC merger, AT&T also bought cable TV operator TCI and later sold it to Comcast. Time Warner has also built up its own cable company, spun it off, acquired AOL then sold AOL.”

With such activities taking place in the spotlight, and with US politicians quick to come out against the proposed AT&T/Time Warner deal, the Federal Communications Commission (FCC) and the Department of Justice (DoJ) are the main regulators to keep an eye on at this time. “They will look into concerns that the tie-up might have a negative effect on competition and therefore the prices consumers pay for services,” explains Ms Su. “The main concern is that further vertical consolidation between distributors of content and creators of content could lead to ‘walled gardens’, where the only way to watch TV Show X is to buy a TV and telephony package from Telco Y.”

Whether the AT&T/Time Warner merger proves to be a deal too far or not, Mr Wissmann’s view is that consolidation is a natural reaction to uncertainty, especially in an environment where ‘owning’ the customer is considered a priority for future success and flexibility. “There are real concerns that as companies consolidate to protect their position, they create an anti-competitive environment,” he says. “It makes sense for the companies to be reacting in the ways they are, but the power and importance of what media and telecom companies deliver poses a real challenge for public policy.”

Consolidation outlook

Going forward, the appetite for consolidation activity in the TMT space will remain strong and the deployment of vertical integration as a corporate strategy will continue, according to Mr Menezes. “CSPs – not just telecoms but also network operators such a cable companies – will continue acquiring and vertically integrating assets they believe will help offset the slowdown of their core businesses, meaning wireless and wireline for the telcos and pay TV subscribers for the cable companies,” he foresees. “Financing is historically cheap and US regulators have tended to allow this type of integration, albeit with conditions,” he adds.

Mr Wissmann is also confident that the consolidation seen in 2016 will continue, unabated, throughout the course of 2017. “As new technologies and technological concepts continue to be developed, having a strong diverse consumer platform will be fundamental for these companies to maintain their economic position. It is likely that such a diverse platform will only be possible through some amount of M&A activity,” he says.

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Fraser Tennant

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