The technology, media and telecommunications (TMT) sector’s structural growth continues to make it a highly attractive area for investment and M&A in both the medium and longer term. Digitalisation is more important than ever because businesses urgently need to innovate, reconfigure and transform in response to dynamic market conditions and emerging technology, such as artificial intelligence (AI).
In the shorter term, TMT M&A activity has been affected by many of the same factors facing dealmaking globally—namely capital constraints, high interest rates, geopolitical tensions and regulatory scrutiny. All these factors have dampened TMT M&A deal volumes and values in the first half of 2023, and we expect the second half of the year will likely follow a similar pattern. We are optimistic current valuations will trigger further strategic deal opportunities.
We discuss below some of the key themes we see influencing how the M&A markets will play out for the remainder of 2023.
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‘M&A activity in TMT is picking up in 2023 due to improving investor confidence and a dynamic and growing market in the technology sector.’
Technology
- Artificial intelligence: AI has received significant attention, particularly over the past few months, being hailed as a potential game changer, presenting an opportunity to transform productivity, and enabling organisations to expand product offerings and enter new markets through a wide range of use cases. The launch by OpenAI of ChatGPT in November 2022 and the subsequent release of GPT4 in March 2023 has offered a window into the opportunities that large language models can deliver.
The increased prominence of AI is expected to drive future M&A activity across many areas of the technology sector, beyond just the pure-play AI companies, as technology companies position themselves for a future in which AI creates the launchpad for a new technological growth phase.
- Software: Software continues to attract investor interest because of the nature of its subscription-based business models. These provide more predictable recurring revenues and cash flows, which are appealing in the current lower growth environment. We expect software deals to dominate technology dealmaking activity in the second half of 2023, much as they did during the first half, accounting for more than 70% of technology deal volumes.
Software deal volumes increased during the first half of the year, up approximately 20% on the second half of 2022, although 1% below the first half of 2022. Deal values are expected to remain below 2022 levels, due to lower overall valuations and fewer larger deals being made.
Private equity (PE) interest in the software sector remains high, as we highlighted at the beginning of the year. During the second half of 2023, we expect PE firms will continue to act on good opportunities, following the trend in the first half of the year with public-to-private deals such as Thoma Bravo’s US$8bn acquisition of Coupa Software, which closed in February 2023, and the proposed acquisitions of Qualtrics by Silver Lake and CPP Investments for US$12.5bn and Cvent by Blackstone and the Abu Dhabi Investment Authority for US$4.6bn, both announced in March 2023. These deals highlight how PE’s appetite and ability to do larger deals in the software sector remains.
- IT services: With the second largest share of technology deal volumes (after software), IT services—in particular, cybersecurity, DevOps, software development, digital transformation and the low-code segments—are experiencing strong growth and margins as organisations transform through digitalisation and security risks grow. In the first half of 2023, we have seen strong cross-border M&A activity in cybersecurity, with US tech companies looking, particularly to Israel, for target companies to build out their capabilities. Additionally, the promise of capturing recurring revenue from managed services propositions has increased the appeal of IT services companies to dealmakers.
- Semiconductors: Although semiconductor deals have been subdued in the first half of 2023, largely due to the tightened regulatory environment, demand for chips shows no sign of slowing, given that semiconductors are at the core of many modern and emerging technologies. Furthermore, the interest in generative AI is expected to fuel even greater demand. While antitrust and national security concerns may inhibit large cross-border semiconductor deals in the second half of 2023, we expect to see plenty of investor interest in semiconductor companies to support further investment in expanding chip manufacturing capabilities. We expect US investment in semiconductor manufacturing will be spurred by the CHIPS for America Act and the FABS Act.
Read our key trends for the media and entertainment and telecom sectors.
Media and Entertainment
- Streaming ecosystem: In the next chapter of the streaming wars and ongoing evolution of the sector, we see an ecosystem under increased pressure to show accretive ROI given the competition for subscribers and high cost of developing or acquiring content. More investor scrutiny regarding the sustainability of the business model will likely lead to some interesting developments as companies try to attract new subscribers and find opportunities to grow new revenue streams and reduce costs.
As foreign markets have a strong appetite for English-language US television content, the Writers Guild of America (WGA) strike will likely affect not only US companies but also overseas streaming companies. During prior WGA strikes, the industry saw a shift away from scripted content towards non-scripted programming, as well as an increase in game shows. Today, the global production landscape is more mature. We anticipate that a prolonged US strike will significantly benefit overseas production and streaming companies and may replace some US content with commensurate-quality scripted content produced overseas. The US market has already shown an appetite for overseas programs—as seen by the popularity of Squid Game and Fauda, among others—and this strike may only serve to further endear other international titles to US audiences. While strike action continues, M&A activity will likely be muted, with investors waiting to see how the writers’ demands for more compensation and improvements to contractual terms play out to assess the impact on future profitability of streaming players.
In the medium to longer term, we believe the highly fragmented streaming ecosystem will create opportunities for deal activity through consolidation.
- Video gaming: The video game sector is expected to remain active through the remainder of 2023, following a similar pattern to the first half of the year, which reported a number of deals in the space. This sector is among those experiencing the most significant growth within the broader media and entertainment space, and the sector remains attractive as dealmakers recognise demand for interactivity across platforms. Video games represent a niche opportunity for companies to raise the level of their content, expand IP, create walled gardens to monetize advertising, and position themselves for the metaverse.
- Sports and live entertainment: Demand for live experiences, coupled with improved data and technology, has excited investors in the areas of sports and live entertainment. In the first half of the year, we saw strategic partnerships form, such as Playtech’s purchase of a minority equity ownership stake in Hard Rock Digital, and several overseas investors eyeing stakes in high-profile sports teams.
We are also seeing new trends emerge to leverage the attractive growth profile of live entertainment and we expect the longer-term shift of consumers’ preferences for experiences will lead to further investment in the sector, although the timing may depend on when the current economic environment stabilises.
Read our key trends for the technology and telecom sectors.
Telecom
- Consolidation: The trend of telecoms consolidation will likely continue, although the pace may slow in the second half of the year as players shift focus to debt reduction to mitigate higher interest rates. During the first half of 2023, the telecoms sector experienced a decrease in announced deal volumes and values of 7% and 67%, respectively, compared to the second half of 2022, largely due to the macroeconomic environment and an absence of any megadeals.
However, other deal drivers remain, such as the consolidation among communications service providers (CSPs) exemplified by Rogers Communications’ US$15bn acquisition of Shaw Communications in Canada, which closed in April 2023, and the finalisation in March 2023 of the sale by Vodafone Group of a 50% stake in its German joint venture FibreCo to Altice as it plans to expand fibre to up to seven million homes in Germany over the next several years.
- Infrastructure divestments: The trend of divestitures of digital infrastructure assets, particularly cell tower and fibre assets, is expected to continue during the second half of the year. The sector saw considerable M&A activity during 2022, which has continued in the first half of 2023, as illustrated by EQT and PSP Investments’ proposed acquisition of Radius Global Infrastructure for approximately US$3bn.
We expect digital infrastructure deals will continue due to strong underlying demand trends, although the higher cost of debt and availability of financing may influence the timing of when further tower and fibre assets come to market.
- Tech convergence: We expect telecom operators to continue attempts to pivot towards higher-growth revenue streams through capability-driven bolt-on acquisitions focused on front-end and back-office infrastructure. Data analytics, cybersecurity and cloud segments remain strong candidates for M&A activity.
Read our key trends for the technology and media and entertainment sectors.
‘Streaming players are facing intense competition and challenges such as rising content costs, subscriber retention, and now the added wrinkle of a US writers’ strike. In a fragmented market facing slower growth prospects, I believe there will be consolidation as companies take action to strengthen their positions and gain a competitive edge.’
2023 mid-year M&A outlook for technology, media and telecommunications
TMT remains the most active sector for M&A despite capital constraints and geopolitical tensions creating global headwinds for deal activity. However, strategic avenues remain for capital deployment. Companies with strong balance sheets can afford to be opportunistic and differentiate themselves from their peer group as they expand their technical capabilities and drive innovation and transformation. Others, with more capital constraints, may face greater challenges. PE firms remain attracted to the TMT sector because of business models with high margins and strong cash flows.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv (LSEG) as of 30 June 2023 and as accessed on 3 July 2023. Certain adjustments have been made to the source information to align with PwC’s industry mapping, and it has been supplemented by additional information from S&P Capital IQ and our independent research and analysis.
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Barry Jaber
Strategy&, Global Technology and Telecommunications Deals Leader, Partner, PwC United Kingdom
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