While respondents almost unanimously agree that convergence is on the rise, many are still acquiring within their own sectors. However, forward- looking companies see convergence as the key to a bright future
While convergence is a distinct trend – and respondents recognise it as such – the majority of participants are considering acquiring closer to their main line of business. However, the picture is far from uniform and cross-sector intentions vary widely across the technology, media and entertainment sectors.
Technology is an ivory tower, with businesses highly conservative when it comes to reaching outside the core. Almost all (99%) say their next acquisition is likely to be another tech firm. However, the acquisition of Nokia’s mobile devices business for $6.1bn by Microsoft stands as a case in point that diversification from within the technology sector has enough breadth to offer advantages such as new delivery platforms and IP licences.
Media firms are more willing to branch out. While 77% are targeting in-sector acquisitions, 19% are considering acquiring an entertainment target with 4% looking to buy in the technology subsector.
Entertainment businesses are the most outward looking of the TME trio. More than a third of companies are planning non- entertainment purchases, with 21% targeting media and a further 13% planning to pursue technology firms.
Deal blockers revealed
Although interest in convergence continues to grow, and awareness of the benefits is high, many companies remain unwilling to step outside their comfort zone: fewer than one in five firms say they plan to make a cross-sector transaction in the next 24 months. Companies seem to be cautious about venturing into cross-sector territory. So which acquisition challenges present the greatest problems?
To determine the major barriers to convergence, we asked respondents to identify their concerns across three key areas: completion, integration and post-closing terms.
When asked to select the most important challenge to completing an acquisition, 33% of firms highlight legal/regulatory barriers, while 22% point to IP rights-related issues and 17% are concerned with the seller/buyer valuation gap.
Integration is perhaps the thorniest of M&A issues. The majority of respondents (31%) point to the difficulty in creating business synergies once the acquisition is completed. And 18% say affecting actual transformative change is also a challenge when integrating an acquisition in the TME space. Meanwhile, high post- merger integration costs and the challenge of operating outside of core competencies were of least concern to most respondents.
Integration planning starts during the diligence process and should accelerate even as term sheets and transactional documents are negotiated and signed. “An effective integration plan needs to be identified and its leaders should be working together well before closing occurs,” says Herb Kozlov.
Post-closing terms pose slightly different challenges for companies carrying out cross-sector transactions. Top of the list are indemnification-related issues: 44% of firms consider these to be the most challenging issue to address, while contingent compensation (including earnouts) is less of a worry – these are cited by 36% of companies. This may be because sellers only agree to valuations that would be satisfactory even if no post-closing payments are realised.
Willingness to embrace convergence opportunities could put acquisitive businesses ahead of the curve. Although intentions for convergence transactions are currently at modest levels – around one in five transactions across the TME spectrum is cross-sector – respondents readily articulate the potential benefits.
Cooperation between TME’s constituent sectors is considered to be the most important benefit by the majority of respondents (29%). “Synergies in deals will help to unlock potential and encourage businesses to try their luck with future opportunities,” says the CEO of a Sweden-based entertainment corporate.
A number of respondents discuss how convergence will make TME businesses even more international. Some describe the benefits of combining customer bases and market shares, thereby increasing joined- up businesses’ visibility.
Convergence is also seen as a trigger of creative disruption in TME corporates by 23% of respondents. “Business models for both industries will drastically change,” says the CEO of a European technology corporate. “More interdependency will assure specialisation and quality of products and services. This will help companies to expand their customer base and to target new product lines for higher profits.”
Further, convergence has the power to transform business performance by playing to the unique strengths of the subsectors – a point emphasised by the CEO of a UK technology firm: “Technology businesses will be able to collect revenue to further develop software and systems that offer value-added advantages, while media and entertainment businesses will be able to attract customers based on complex offerings of technology to adjust to changing trends.”
While the case for convergence is clear, it seems that TME businesses are not putting knowledge into action. Corporates should think creatively when considering their next acquisition, and not be afraid to step outside their comfort zones.
The convergence matrix
The matrix (below) shows the waves of convergences from each of the three main sectors into their subsectors. Taking technology first, it’s easy to see that its tendrils are very much connected to its own subsectors. In media and entertainment, there are only two convergence deals from technology — one in TV production and one in advertising.
However, the matrix reveals that media and entertainment are showing a nascent but keen desire for convergence.
While there is still a concentration of media companies buying within their own subsectors, they are spreading their tentacles fairly far and wide, especially into the entertainment subsector. However, there have been a handful of deals within the technology subsectors.
The entertainment sector has been the busiest in terms of convergence acquisitions. Not only have entertainment companies done at least one deal in the majority of media subsectors but they have also done deals in over half the technology subsectors.
The matrix very much bears out the findings of the report — in terms of convergence, tech lags behind, media firms are more willing to branch out, and entertainment is ahead of the pack.