What are the drivers behind the current wave of M&A in the TME sector?
Gregor Pryor: We have witnessed growing confidence in M&A in the TME sector since 2008. There have been clear improvements in technology that have resulted in the re-emergence of the advertising sector, playing an important role in driving faster growth in companies, especially online. Digital advertising has also driven revenue for both established and new companies. This growth in confidence is coupled with a very rapid consumer adoption of digital media. If we consider the likes of Netflix, Amazon Prime, PlayStation and Apple, we can better understand the growth as consumers become more and more accustomed to dealing with this technology, in turn driving acquisitive behaviour.
An additional factor is the financial environment: companies have been more prudent after the recession and that means there is a large availability of cash-reserves, in addition to cheap borrowing. There are also some great private equity (PE) and venture capital (VC) funds that are delivering strong returns.
Established businesses that are looking to get a route into “new media” need to acquire fast-growing competitors. Some of the most interesting deals are early stage tech businesses getting acquired by mid-market companies who want to acquire similarly-positioned companies to create a broader brand strategy.
What are the challenges facing companies looking at TME sector M&A?
GP: The biggest economic challenge is price. For a company with a good growth curve, no distress, and PE/VC funding behind it, the pitch becomes competitive quickly. The other challenge is certainty as the market is shifting quickly, meaning it is difficult to say where those companies are going to net out in five years. For example, in 2013, AOL bought Bebo for $850m and then sold it for $1 million. Tech businesses tend to be overvalued because there is a – sometimes unduly – high premium on intellectual property that is by nature hard to value. Companies buy patents which seem to have inherent value but it is hard to determine what that value might be.
Another challenge is understanding the space in which a company is launching an acquisition, for example, educating a tech company about music copyrights. If you look at the big music companies, they get very seduced by the idea that Apple or Google are going to change their commercial paradigm in the next five years.
From a legal perspective, one of the main challenges that companies face is the inconsistent policy positions both domestically and internationally on copyrights. A US Copyright Office report suggests that the government or regulators are inclined to make drastic changes to the existing regime. People start to become nervous when regulators say they are going to do radical things or they suggest that things are fundamentally broken.
In Europe, there is a high degree of uncertainty because of a campaign by the European Commission trying to break down what it considers territorial borders for copyright in Europe. If you are Apple, you would segment the market by territory for movies and apply differential pricing across these territories. The debated changes would remove those territorial boundaries. Regulations for online and mobile are still very new, with most laws only being 20 years old.
How can companies prepare for regulatory change?
GP: Companies can try to be involved in public affairs and trade associations that keep them appraised and updated about policy developments on the government and regulatory level. Often companies cannot speak to their competitors so being involved in trade associations is important.
Second, companies can structure products and services with an eye to possible changes. They should also have a Plan B if changes become mandatory due to regulatory law. Data is one example - companies will need to prepare in advance for the significant changes planned in data protection law. Those that are able to make provisions in good time will see the greatest benefit.
What is your advice to newcomers to the TME sector?
GP: There are lots of examples of technology companies that have entered into content and entertainment, some have succeeded brilliantly whilst others have floundered somewhat. Apple, a technology company, got into content on the basis of being a storefront only. They don’t have celebrity endorsements and they don’t produce their own content. Apple clearly defined its position in the market place as a distributor and sticks to its core business. On the other hand, Samsung has had difficulty launching its own content business. They had celebrity tie-ins and spent a fortune on marketing but their biggest problem is that they are seen as deep-pocketed.
Growth within the M&A sector has resulted from a number of factors including improvement of technology and the change of consumer behaviour. While there is great opportunity for companies looking to expand within the TME sector, it is clear that many challenges remain. An understanding of the sector, as well as preparation for regulatory impact will be pivotal to the success of businesses as they look to expand their operations in an increasingly competitive market.