TMT M&A trends: Cautious optimism ahead?

A lull in volumes, but the US and EMEA prop up deal value in 2024

As predicted, high interest rates have continued into 2024. The consequential increased cost of capital continues to weigh on company valuations, creating the potential for a disconnect between sellers and prospective buyers and a decline in exit opportunities – evidenced by reduced deal volume for H1 when compared with the same period in 2023.  Private equity sellers have felt this challenging environment particularly keenly, as they balance the potential for improved valuations (and greater returns) in the future against the need to return capital to their investors.

In our previous briefing, we anticipated that cash-rich corporates could be well-positioned as buyers in a market impacted by high interest rates. In this context, it is interesting to note that the largest deal in the TMT sector during the first half of the year was the $33.5bn acquisition of Ansys by Synopsys,  expected to close in H1 2025, with the transaction announcement indicating that Synopsys intends to fund the $19bn of cash consideration through a combination of cash on hand and debt financing (with $16bn of fully committed financing obtained). 

While volumes have struggled, there is a more positive picture for aggregate global deal value in H1 2024 which is up materially compared to the same period last year. This has been driven primarily by activity in EMEA and the United States where lower inflation and an expected cut in interest rates facilitated a more productive deal environment.

Cautious optimism for the months ahead

While M&A activity in the TMT sector has some way to go before it can compare with the highs of 2021, there are many reasons to feel cautiously optimistic about the rest of 2024. 

Reductions in interest rates in a number of jurisdictions such as the recent rate cut by the US Federal Reserve, may help to assuage fears of a recession and give renewed impetus to prospective buyers who have been waiting for an opportunity to return to the fray. There is certainly pent-up demand in the market as private equity buyers with record levels of dry powder ($2.7tn at the time of writing) are coming under increasing pressure to deploy capital while simultaneously seeking exit opportunities in respect of existing portfolio companies in order to return value. Any reduction in the cost of debt financing may therefore create the conditions for a rally in the latter half of this year and/or the first half of next year. However, ongoing geopolitical events continue to create uncertainty in the markets, and the upcoming US elections and imminent fiscal announcements from new governments (such as the Autumn Budget in the United Kingdom), are likely to lead some dealmakers to hold back from large-scale M&A until there is more clarity on new policies.

Growing investments in artificial intelligence and related technologies, and the need for the digital infrastructure to support these developments, is expected to continue to drive the markets forward – however, given the relatively nascent state of deployed AI services and increasing focus by regulatory authorities (as further discussed below), the majority of AI-related transactions are expected to be strategic in nature. As the potential for over-valued companies in the space grows, demonstrable use cases will be vital to ensure the market doesn’t lose confidence in the sector.

Regulatory focus

The TMT sector continues to be an area of focus for regulators, in particular in the context of deals involving large technology companies, with the UK’s Competition and Markets Authority (CMA) (for example) looking at alternative structures including non-controlling minority investments, partnership agreements and even hires of teams of developers through a merger control lens. 

In the UK we will also see changes as a result of the Digital Markets, Competition and Consumers Act 2024 which is expected to come into force by January 2025, and applies to firms designated with Strategic Market Status in respect of one or more digital activities (so-called SMS firms). Among other things, SMS designees will be subject to new turnover- and “share of supply”-based jurisdictional triggers for review of transactions by the CMA, along with a new “hybrid” threshold intended to make it easier for the CMA to review so-called “killer acquisitions”. While filings under the UK’s general merger control regime remain voluntary, SMS designees will be subject to mandatory reporting obligations if they (or any member of their group) enter into transactions amounting to a “reportable event” – increasing the CMA’s awareness of transactions and enabling it to decide whether to call them in for review.

In terms of the UK National Security and Investment Act (NSI Act) it remains to be seen whether there will be any noticeable difference in how the regime is applied by the new Labour government and whether it pushes ahead with certain reforms that the Conservatives had been considering – for example changes to help clarify (but which would also potentially expand) the sectors subject to mandatory notification. 

The focus on securing jurisdiction to review killer acquisitions is also reshaping merger review thresholds in the EU. In its September Illumina judgment, the European Court of Justice (CJEU) ruled that the European Commission (EC) does not have jurisdiction to accept a “referral” from a member state in circumstances where neither the European Commission nor the member state have original jurisdiction to review the deal. The EC is considering this significant judgment, considering the routes open for it to continue to be able to review killer acquisitions. 

However, in the almost four years since that deal was announced, the Danish, Hungarian, Irish, Italian, Latvian, Lithuanian, Slovenian and Swedish national merger control rules have been amended to enable review of certain “below-threshold” deals, and the French have announced that they are considering amending their rules to enable such review. Alongside with the pre-2020 German and Austrian amendments that introduced “size of transaction” merger review thresholds, these changes significantly increase the number of deals over which member states can assert jurisdiction, enabling them to then refer those deals to the EC for review.

Finally, since the EU Digital Market Act (DMA) came into force, the EC has been “informed” of eight deals by five of the designated “gatekeepers”, with the EC being informed about five of those deals in H1 2024. The obligation to inform the EC of all deals was introduced to ensure that the EC is aware of potential killer acquisitions by DMA gatekeepers. In future, however, the EC’s ability to actually review those deals will turn on whether the jurisdictional issues described above are resolved to enable EC review – the DMA itself does not give the EC the power to review these deals. 

Looking ahead

The first half of 2024 showcased the resilience of the sector, with the robust deal values seen in the US and EMEA markets underscoring its potential. Looking forward, the anticipated easing of monetary policies could be the catalyst needed for dealmaking to build momentum. TMT's intrinsic link to disruptive technologies, particularly in AI, will also undoubtedly continue to be a key driver of activity in the sector. 

Private equity firms, armed with substantial reserves, are poised to capitalise on any shift towards a more favourable economic environment, while large corporate buyers continue to strategically navigate the ever-evolving regulatory landscape. However, continuing broader geopolitical and economic uncertainties mean that in order to effectively capitalise on the opportunities that arise, deal makers will need to remain vigilant, adaptable, and informed.

Sources

Datasite – Deal Drivers: Americas HY 2024; Datasite – Deal Drivers: APAC HY 2024; and Datasite – Deal Drivers: EMEA HY 2024;

Synopsys to Acquire Ansys, Creating a Leader in Silicon to Systems Design Solutions;

Federal Reserve Board - Federal Reserve issues FOMC statement;

Preqin – data accessed 20 August 2024;

Lockton EMEA Private Equity Update: H1 2024;

Global M&A trends in technology, media and telecommunications: 2024 mid-year outlook | PwC