In focus: Tech and M&A
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There were 1,114 TMT deals worth US$363 billion in 2016. Even though wider M&A markets were muted, the sector continued to deliver landmark deals in the technology space, such as Microsoft’s US$25.5 billion acquisition of LinkedIn and CenturyLink’s US$34.5 billion purchase of Level 3 Communications. Jason Rabbitt-Tomita, a partner at White & Case, says it is not unusual for technology dealmaking to remain relatively insulated from wider macro-economic and M&A trends. “The M&A market for technology is less closely tied to the overall health of the economy. It is less about whether GDP is growing by 1 percent versus 3 percent in the next year. The value generated by acquisitions is much more fundamental,” he says. “Deals are driven by new technology and data that allow for the provision of new goods and services to consumers in a way that results in market growth that is outsized and above the normal rate of growth.”
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As the combination of technology and data becomes increasingly valuable, it will stimulate M&A in other technology subsectors
Microsoft’s purchase of LinkedIn is an example of how the combination of technology and data is sustaining deal activity in the tech space. The quality of LinkedIn’s data and membership is of the highest order and serves as an invaluable resource for the development and marketing of new goods and services. The deal shows that the technology industry has become less focused on developing proprietary software and locking users into particular technology ecosystems. Instead, the priority is about analyzing data to identify new customers and sell more to existing ones. Rabbitt-Tomita says that as the combination of technology and data becomes increasingly valuable, it will stimulate M&A in other technology sub-sectors, such as artificial intelligence. “There is a lot of interest in artificial intelligence. I think the reason for that is the emphasis on processing data efficiently and taking that data and monetizing it. The numbers are not super large but if artificial intelligence gets bigger, which it very well could, that could be something on the tips of people’s tongues more often,” Rabbitt-Tomita says. (See more on the potential of artificial intelligence M&A).
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In addition to linking software and data, ongoing convergence across the cable, television, broadband and telephony industries has continued to be a strong driver of deals in the TMT sector, as demonstrated by AT&T’s Time Warner bid. Consolidation across these industries has raised antitrust challenges, but the fundamentals underpinning the deals are so strong that companies have continued to pursue M&A. If you look at consolidation in the cable and TV and content provider space, it does appear to be driven very much by the transformation of the way in which people are consuming content, which is very much technology driven. The traditional cable business is looking forward 10 years and realizing that it needs to have content and the infrastructure to distribute that content over the internet to consumers. They have to do these deals in order to shape themselves appropriately going forward,” Rabbitt-Tomita says. The semiconductor industry is another technology subsector where deal activity has been robust, with Qualcomm’s US$45.9 billion acquisition of Dutch group NXP Semiconductors one of the key deals in the semiconductor space in 2016. “The semiconductor industry requires a heavy amount of capital investment and a lot of R&D. I think many of the transactions have been driven by simply achieving economies of scale,” Rabbitt-Tomita says. “Companies feel that they can reduce the cost structure and get more revenue. It is accretive to combine and that trend may very well continue.”
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The TMT sector was once again the busiest and biggest sector for dealmaking in 2016, driven by the continued technology boom
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