Manatt Digital, a fully integrated professional services division within Manatt, Phelps & Phillips, LLP, today announced the results of its study, “Shaping the Future: Trends in Digital Media and Frontier Technologies M&A,” revealing top technology executives’ attitudes on mergers and acquisitions as a part of their companies’ growth strategy. The study shows that executives use M&A to quickly enter and dominate new markets, but remain hesitant about acquiring emerging technologies even while they’re gaining traction, and they prioritize Scandinavia as the hottest region for M&A, among other findings.
Because tech companies increasingly leverage M&A as a key part of their growth strategy, Manatt Digital sought to analyze and better understand media and technology companies’ attitudes toward it. Manatt Digital conducted a survey of 100 senior executives from around the globe, together with financial intelligence firm Mergermarket.
Key findings from the survey include:
- Using M&A to penetrate new markets. Overall, more than half (51 percent) of acquirers from different regions still share the same priority: to enter new market segments. Respondents also revealed that content is the lead priority, even as monetization of that content remains vital as well, with 51 percent of respondents saying they will focus their M&A targeting in digital media services this next year. A premium is also put on strategic technology and patents, with 47 percent of respondents deeming this their primary motivation for M&A deals.
- Integration is most vital but most challenging. While 39 percent of respondents said that integrating work culture was the most vital aspect in M&A integration, 51 percent of them found integrating work culture to be the most significant challenge in the process. This misalignment of priorities is especially true in deals between agile startups and larger, established corporations. The challenge comes when the executives working on the M&A transaction are often not the same executives responsible for the integration and execution.
- The appeal of Scandinavia. The survey findings also showed that Scandinavian countries represent the top cross-border priority for almost one in two (48.5 percent) respondents, followed by the UK. These results indicate that the Scandinavian region is the leading target for buyers—perhaps reflecting the reputation of countries such as Sweden and Denmark for innovation.
- Thinking globally. A significant 42 percent of respondents do not think that local specialists are essential when targeting deals. Forgoing local knowledge for cross-border M&A deals at the targeting stage could lead buyers into a minefield of regulatory and cultural issues. However, when it comes to due diligence, 81 percent believe local specialists are vital for all deals.
- Risk vs. reward. Only 42 percent of responding companies are doing truly global deals, which may be due to the current macroeconomic and geopolitical volatility. Even fewer are willing to target early-stage startups (those less than two years old).
- Looking at the present. While the majority of respondents were focusing on those segments that make sense at present, such as digital media services and advertising and marketing tools, far fewer were concentrating on aspects such as gaming, augmented reality (AR) and drone technology. In the survey, 45 percent of respondents cited wrongly evaluating a technology’s importance or potential as the biggest risk in considering M&A deals for frontier technology, illustrating that emerging technologies are considered risky and not as appealing to acquire as established technologies. However, these emerging technologies are gaining more traction when aggregated.
- Critical importance of due diligence. The study also found that due diligence for M&A in these companies is more difficult and complex than it is for another industry. When asked what aspects are most challenging when conducting due diligence on a potential digital media or frontier acquisition, 75 percent cited valuing a target’s real assets, including data, technology and hard assets. Interestingly, 60 percent of respondents said that valuing their assets is also the most vital aspect of conducting due diligence.
“Our study highlights many important M&A trends in the technology industry. Among these findings, executives expressed particular interest in frontier technologies,” said T. Hale Boggs, chairman of Manatt Digital. “Companies involved in AI, AR/VR, IoT, eSports and live streaming are among the most compelling global acquisition targets.”
The survey results indicate that dealmakers looking for value-adding transactions in the months and years ahead should be prepared for competition. Scandinavia and the UK both appear poised for cross-border M&A attention in the near future, and there may be increased deal activity in the emerging digital technology sectors such as digital media services, IoT, AR/VR and artificial intelligence.
“M&A is often the best way for digital media companies to capture or retain their market leadership, and because it has become such a crucial component of growth planning, we wanted to see where global executives see M&A currently and evolving in the future,” said Ben Orlanski, chair of Manatt’s M&A practice. “In all, we found that M&A is a prime strategic opportunity for technology companies—though accompanied by challenges of due diligence and company culture integration—and is a great way for them to get a leg up on the competition in new and existing sectors.”
In Q3 2016, Manatt Digital and Mergermarket surveyed 100 senior global executives to understand their strategies and views regarding M&A in the digital media and frontier technology sectors. Respondents were split geographically across the US (50 percent), Western Europe and Scandinavia (25 percent), and Greater China (25 percent). Respondents were also divided among corporates (50 percent) and dealmakers (50 percent); the latter included private equity partners, venture capital investors and investment bankers. The full report is available for download on the Manatt Digital page of Manatt’s website.