Buy the dip, or study themes?
COVID-19 has put the brakes on M&A activity in the technology, media and telecommunications (TMT) sector, but the lowered company valuations may offer Big Tech and deep-pocketed funds long-term opportunities worth grasping.
That’s according to a new report from GlobalData, which notes that after a buoyant 2019, tech M&A activity has taken a hit from COVID-19, with Q1 2020 deal values down by 26 percent and declines tracked across all of the TMT sectors.
It names chipmakers AMD, Micron and Xilinx as among the attractive opportunities on the hardware side (along with Nutanix, Pure Storage, and Ubiquiti, among others), while on the software side security firms dominate its list, including Rapid7, Palo Alto Networks, Qualys and Splunk, among others).
In the first quarter of 2020, a total of 150 M&A deals with a transaction value greater than $50 million were announced, according to GlobalData. Their combined transaction value was $119.2 billion, which was flat compared to Q4 2019, but 26 percent down on the same quarter last year. Deal values are expected to slow substantially in Q2.
Tech M&A in 2020: Attractive Targets Named
Last year M&A value in TMT grew by 20 percent to $737 billion. The key themes driving this activity included AI, IoT, cloud computing, healthcare, fintech, “big data”, internet TV and robotics. With the market now contracting, the GlobalData report explores the key themes investors should look out for and details the immediate impact and possible long-term repercussions facing TMT sectors in the wake of the pandemic.
Global Data finds that while all TMT sectors have declined this year, it’s a mixed bag with some sectors taking bigger hits than others.
IT services are under pressure to deliver existing projects to clients in lockdown, and a more long-term slowdown is expected as companies scale-back IT projects in a bid to protect 2020 margins. Application software vendors can expect very little new business on the books before Q4, the report suggests. (Experiencing something radically different? Feel free to let the Computer Business Review team know!)
The consumer electronics sector meanwhile faces a catch-22.
Currently, the pandemic has caused a rise in consumer demand which is being stifled by global supply chains effectively shutting down. However, as lockdown regulations ease and supply chains become more effective, the world is likely to enter a recession, with fewer consumers spending money on high-end electronics.
Some sectors are facing better prospects. Telecom operators offering the critical commodity of reliable connectivity are reasonably isolated from the COVID-19 fallout.
Similarly, cloud services should see a rise in demand due to the increase in work from home (WFH) culture. Zoom and Slack have already seen their valuations improve.
Since the COVID-19 wave hit, many TMT companies have seen their valuations lose a third in the last three months, which could pose investors ripe opportunity, despite signs of a market recovery. Big Tech will continue to dominate M&A deals in the sector, with the aim of strengthening their skillsets in next-generation technologies.
However, companies should do their research before pulling the trigger to take advantage of lowered valuations. The report reinforces the importance of picking the right themes when investing in TMT. Thomas Cook’s lack of investment in key themes such as the sharing economy and e-commerce resulted in a missed opportunity to acquire Airbnb, for example. The report cited this as a possible reason why the British travel agent collapsed in September 2019. If Thomas Cook had acquired Airbnb when it was valued at $0.5bn in 2010, the company could have been worth $31 billion today.