Strategic M&A drives TMT sector forward in 2024

In 2023, the global TMT sector faced a significant downturn, with deal volumes falling by thirteen per cent and deal values plummeting by 64 per cent. This stark decline follows the peak activity of 2021. The TMT sector, like others, grapples with inflationary pressures, rising interest rates, and evolving regulatory landscapes.

While the Netherlands mirrored the global trend, its TMT sector's deal activity remained robust. The Dutch M&A market saw a fifteen per cent drop in total deals, yet TMT transactions increased by four per cent. This resilience might stem from a stable mid-market and sustained interest in specific subsegments. Despite this, there was a notable 39 per cent decrease in deal value, indicating a pivot towards smaller, add-on deals.

The M&A landscape has witnessed a surge in acquisitions within the software and IT services sectors. These sectors are known for their predictable cash flows and robust valuation ratios. With a constant demand for premium targets and stable valuations, the Netherlands' transaction environment is expected to remain vibrant. A resurgence of large-scale deals is anticipated, supported by stabilizing interest rates and sustained interest from strategic and financial buyers, leading to high EBITDA multiples. Although specific figures cannot be substantiated and are highly dependent on the particular asset, it is plausible that multiples will lie between fifteen and twenty times, or even higher for growth-phase companies.

Emerging technologies such as artificial intelligence (AI), cloud computing, and cybersecurity continue to be significant drivers for M&A activity in the TMT sector. AI, in particular, has revolutionized numerous industries and spurred innovation. 'AI is revolutionising the TMT sector as companies eagerly seek to integrate AI startups into their digital transformation strategies. The potential of AI to drive innovation and unlock new revenue streams is vast’, says Lorenzo Casciscia, expert deals strategy at PwC.

Regulatory changes and geopolitical developments are poised to significantly influence the M&A landscape. Increasing governmental focus on privacy and data security is complicating cross-border transactions and necessitating strategic adjustments. Additionally, experts point to the persistent skilled worker shortage in the TMT sector. The rapid pace of technological development has led to a huge demand for specialized professionals, presenting recruitment and retention challenges for companies. Dutch government policies may further limit access to specialized foreign workers, potentially impacting companies reliant on specialised technical skills.

‘The shortage of skilled workers is an urgent issue in the TMT sector. The demand for specialised professionals in emerging technologies such as AI and cybersecurity far exceeds the supply. Companies need to be proactive in attracting and retaining top talent to remain competitive', according to Casper Scheffer, TMT Deals Leader at PwC.

Private equity is expected to continue its pivotal role in TMT deal shaping in 2024. With their emphasis on high-growth and scalable sectors, private equity firms find the TMT sector's diverse subsegments, particularly software, highly appealing. Despite high valuation ratios and the effects of rising interest rates, the investment climate appears favourable. This optimism is rooted in the TMT sector's unique traits and the robust scale-up culture within the Dutch market.

Private equity's role in Dutch transactions has increased from about 39 per cent of deal volumes in 2019 to over half (55 per cent) in 2023, with expectations for this trend to persist. Long-term investors are also increasingly attracted to telecom infrastructure investments, such as data centres, for their potential to deliver consistent returns and support sector growth. ‘The TMT sector remains a magnet for private equity, attracted by the significant growth prospects and the ability to generate robust, recurring cash flows', says Cornelis Smaal, private equity leader at PwC.

• Emerging technologies
  The convergence of technologies like artificial intelligence (AI), the Internet of Things (IoT), and 5G is expected to create new M&A opportunities. Companies are in pursuit of expertise and capabilities in these domains to foster innovation and growth.
• Regulation
  Regulatory shifts concerning data privacy and data processing will affect deal activity. Companies must focus on both compliance and risk mitigation.
• Market consolidation
  The TMT sector is primed for consolidation as companies aim to strengthen their market position, expand service offerings, and create value through commercial and operational synergies. Further consolidation of IT services and the emergence of IT platforms are anticipated.
• Strategic acquisitions
  With a resurgence of larger deals on the horizon, strategic buyers are expected to become more active and potentially dominate the market.

‘The add-on acquisitions of recent years pave the way for larger-scale deals in 2024. Market dynamics are improving, and investors are ready to reap the benefits of their buy-and-build strategies', says PwC expert Chris van Haarlem.

The growing focus on Environmental, Social, and Governance (ESG) considerations is profoundly impacting transactions within the TMT sector. Sustainability is now extending beyond mere compliance to impact company valuations directly. Investors are paying close attention to how ESG trends affect cash flows, the distinct competitive advantages that sustainability can offer, the potential for penetrating new markets, and easier access to financing. ‘Companies that succeed in integrating sustainability into their core operations have a future', according to Fleur Bischoff, ESG specialist PwC.

From an environmental perspective, TMT companies are encountering both opportunities and complex challenges in areas like energy usage, emissions, and material circularity, particularly within hardware-centric subsectors. Socially, aspects such as workplace diversity and ethical use of products take on heightened importance, notably in areas like AI and software development.

Governance issues are primarily about adapting to changing global standards, such as adhering to the Corporate Sustainability Reporting Directive in the EU. While compliance with laws and regulations is a given, the scope for action is broader: effective implementation provides valuable insights as data on ESG performance becomes available and can inform business decisions. ESG factors are set to be a significant influence in shaping the TMT sector, offering the industry a chance to facilitate the transition to innovative business models.