As I write this at the beginning of August, the UK is predicted to have a heatwave arriving very soon and so it feels like an appropriate time to be thinking about M&A in the TMT sector: calling it a hot market is something of an understatement!
It was timely to discuss M&A themes and trends at the latest in our ‘Future of’ series and we were delighted to be joined by three external panellists all bringing their different perspectives: Annalisa Amadio, Group Strategy Director at London Stock Exchange Group; Massimo Marinelli, Executive Board Member of sports and entertainment specialist investor, Aser Ventures; and Crevan O’Grady, co-founder and managing partner of tech investor, Volpi Capital. In addition, we were joined by Alfonso Marone, Head of Deal Advisory and Value Creation for TMT at KPMG.
Hot – and staying hot
The M&A market across all TMT sectors and sub-sectors is buoyant. Alfonso Marone went so far as to describe it as a “golden era of TMT investing, with a new wave of investors coming to the fore alongside established investors.” Corporates, PE houses, infrastructure funds – all are very active.
One theme we’re seeing is an acceleration post-COVID of activity in the B2B2C space – with deals taking place to acquire capabilities that enable the broader value chain, such as businesses that enable online events, contextual search providers for ecommerce applications or players providing shopping carts for retailers.
COVID-19 hasn’t shut deals off – a prime example being LSEG’s $27 billion acquisition of financial data provider Refinitiv that closed in January this year. Annalisa Amadio also pointed out that LSEG had successfully divested of Borsa Italiana during the pandemic too.
For tech-focused PE house Volpi Capital, Crevan O’Grady said that COVID-19 had not changed their strategy – the underlying principles remained the same as they looked in particular for businesses they could help internationalise. “We do need to stay ahead of the more generalist competition,” Crevan said, acknowledging the crowded nature of the market.
How do you avoid overpaying?
In such an environment, a natural concern becomes not to overpay as multiples get pushed higher. As Alfonso Marone observed, “multiples are sky high even for businesses that have little revenue today but a strong promise of growth.”
Massimo Marinelli of Aser agreed that valuations have become “very aggressive” but said that there are several ways in which their business looked to ensure they can achieve good value.
“We focus on sectors and sub-sectors we know well and have strong connections that we can leverage,” he said. “We always look for opportunities where we can add value through our considerable in-house management expertise. And if we agree to pay a higher premium upfront, we’ll look for ways of extracting more value further down the line – for example through launching a JV where we have a higher share than we would otherwise have done.”
As Annalisa Amadio observed, high growth sectors like TMT and FS will naturally attract a premium. This is exacerbated because “demand from investors is higher than supply.” It’s essential therefore to approach the market strategically, looking in great detail at value creation opportunities and planning well ahead.
Getting value post-deal
It remains almost unavoidable though that prices in today’s market are full – with Alfonso Marone remarking that yesterday’s 10-15 times Ebitda has now become more like 20 – and we could even hit 30. However, Alfonso had a warning: “More work will be required by management teams to keep valuations up – in terms of detailed management plans that address organic and inorganic ways driving returns from the investment.”
As Crevan O’Grady said, “If you win a competitive auction, that means you’ve paid the highest price. So your plan therefore has to be better than the next bidder’s to get return on capital – that’s simple maths.”
Some of this value extraction may come down to professionalising the asset acquired through better data systems, KPI’s and installing an experienced CFO. But ultimately, as Crevan said, “we buy a business because we believe it has that potential. We buy it because we believe it can be best in class.”
The ESG question
Another theme that almost inevitably came into the conversation was ESG. All of our panellists agreed that ESG had entered their investment criteria – it’s simply unignorable.
“We were already very focused on ESG at LSEG, long before it became the hot topic it is today,” Annalisa Amadio said. “Carbon data is very aligned with our commodities business. There’s increasing demand to move from traditional index asset allocation to more sustainability-related indices. There are enhanced ESG data needs in the market.”
Alfonso Marone underlined just how critical ESG is becoming when he said: “Not having ESG-compliant metrics will be a blocker for receiving investment, whether that’s public or private capital.”
For Massimo Marinelli, diversity is a particularly significant dimension and he observed that it’s featuring especially strongly when they do business in the US. “It’s becoming a very important theme for us to focus on.”
Crevan O’Grady agreed that ESG has become “very mainstream” – even if it remains somewhat early days in terms of consensus around targets and outputs. “Some of these are still too woolly for anyone to have cracked the reporting bit yet. No one is quite sure yet how you make money from ESG either!” he said.
Overall, it was a fascinating discussion that strongly underlined the active momentum in the market and the opportunities for value creation in TMT. If you would like to attend our next event, which will be focused on the 'Future of Cyber Security in the TMT sector' and will take place on Tuesday 21st September from 12pm, please email Sarah.Noel@KPMG.co.uk to confirm your place.