During Q1 of 2014, 5 out of the top 10 M&A deals were in the Technology, Media and Telecom sector. I’m sure this comes as no surprise, as historically, TMT has driven and continues to drive both business and consumer behavior on a global scale.
But is the increased M&A activity in TMT an anomaly, or are we finally seeing the global uptick we have been waiting for since 2008? As an investment banking firm that creates value, we at CKS Advisors see Mergers & Acquisitions as a phenomenal growth opportunity in all sectors, and I’d like to take this opportunity to explore the subject in greater detail.
Over the past few years, I think we can all agree that M&A volume has been lower than many of us who have been in the industry for more than 20 years have experienced. Certainly, it can be pointed out that the economic downturn in 2008 played a large role in fewer M&A transactions as businesses struggled just to stay fiscally viable.
As a result of that downturn, many businesses shored up their spending and focused on weathering the storm. However, corporations are now looking at their balance sheets and realizing the extent to which they have taken on debt over the past 6 years. Which is to say, very little.
According to Credit Suisse’s Global Equity Strategy Team, the abnormally low levels of debt seen with many corporations have presented exceptionally good opportunities to boost earnings by joining forces with or acquiring other companies.
In a 2014 report by the group, it is noted that much of the recent European and American M&A activity has been in the form of share buybacks. Many times, it says, companies will step up their M&A activity as the stock market rises, and in 2013 the S&P rose by 32%. Finally, the report goes on to note that 73% of US companies and 56% of European companies have an astonishingly low level of debt on their balance sheets compared to total market capitalization.
So, corporate cash levels are rising and debt levels are falling, and as technology continues to dominate corporate and consumer spending, many in the TMT sector have led the recent M&A charge as a way to boost immediate earnings, and to enhance a long-term diversification strategy.
Facebook, for example, announced in February the acquisition of a mobile messaging platform called Whatsapp from Sequoia Capital for a reported US$19B. The social media giant had been experiencing a vast drop off in users in the youth market, and Whatsapp is incredibly strong in that demographic, having generated more than 450M active users per month, globally.
Facebook hopes to attract a more youthful audience with the app, which allows people to message each other with mobile devices via data as opposed to text messages, saving its users potential roaming charges. And ultimately, Facebook hopes to transform the way people experience technology over the long-run with the app, regardless of whether or not the company generates immediate financial benefits.
Similarly, Google continues to expand beyond search engines with forays into smart technology. In January, the company announced that it would acquire Nest Labs, a company that creates smart thermostats and smoke detectors, for US$3.2B.
In total since December of 2013, there were nine M&A transactions announced in the TMT sector that were valued at more than US$1B, and in each case the acquirer’s stock jumped by more than 5% the day of the announcement, with an average increase of 17%.
On the European side, additional factors have driven the need for TMT transactions, including regulation changes by the European Commission. The group has proposed to move Europe’s telecommunications industry from one that is segmented by country to a single market. Receiving a license to operate in one EU country, if this is passed, will enable a company to operate throughout the European Union.
This has triggered acquisitions across the EU, and the trend is not likely to die down any time soon.
As an example, many fixed line telecom providers in Europe are taking hits from the mobile device industry, and mobile device companies are looking to enhance revenues by acquiring fixed line operations. Vodafone announced one of the larger transaction for Q1 2014 when it made public its plans to acquire Grupo Corporative ONO out of Spain for US$10B in anticipation of EU regulatory changes that will strengthen Vodafone’s presence in the country.
It should be noted, however, that the Credit Suisse reports goes on to say that while M&A volumes should continue to accelerate throughout the remainder of 2014, not all industry sectors will follow the TMT trend.
Casual dining restaurant chains, for example, are not likely candidates for consolidation, suggests restaurants analyst Karen Holthouse, who says that “high multiples [have made] public targets somewhat unattractive.” Driving home the point are industry staples Starbucks and Darden Restaurants, Inc., both of whom have stated publicly that they are not immediately in the market for new properties.
But let’s bring this back and look at the ultimate message: strong markets tend to encourage Mergers & Acquisitions, and Mergers & Acquisitions tend to drive strong stock markets.
Historically, the S&P climbs about 9% during the immediate two Quarters following the stage of the economy’s business cycle that marks the end of a period of declining business activity and the transition to expansion, such as the M&A market is currently experiencing.
With TMT leading the way through a very active and interesting Q1, we expect other industries both large and small to follow suit.
And as we head into what analysts predict to be a robust recovery in M&A activity for the foreseeable future, CKS Advisors will continue to stay on top of industry trends and spur greater value creation for our clients. Now is an excellent time to join this conversation, and we welcome the opportunity to discuss this in greater detail with you.
This post published June, 2014 by Dennis J. Cornelius, Managing Director CKS Advisors LLC – firstname.lastname@example.org