Despite continued challenging conditions, 2013 saw a number of 'mega-deals', with the gem in the crown being Vodafone's $130 billion disposal of its 45% stake in Verizon Wireless. The deal, the largest M&A transaction (across sectors) of 2013, was the third largest of all time (shortly behind Vodafone's $202 billion acquisition of Mannesmann in 1999 and AOL's $160 billion acquisition of Time Warner in 2000). Although significantly larger than other deals throughout the year, it was accompanied by a series of impressive transactions.
The Verizon deal is reported to have been envisaged for more than a decade, with bankers having allegedly been in a state of readiness to implement the transaction in 2004. Although tax and interest rate implications reportedly influenced the transaction receiving the green light in 2013, conditions were generally favourable for the implementation of this mega-transaction. Alongside the impressive enterprise value, this transaction saw one of the largest-ever financing packages at over $60 billion.
The Verizon acquisition accounted for 5.6% of global M&A activity in 2013, demonstrating the impact of substantial transactions on global deal value. The deal also represented almost one-quarter of total technology, media and telecommunications (TMT) M&A activity over the year.
Despite 2013 hosting a number of sizeable transactions, the outlook was not altogether positive; it was the third year of total decreasing M&A activity globally (with activity at its lowest level in eight years). However, the outlook for the TMT sector was relatively optimistic.
MergerMarket has produced a summary of global TMT M&A statistics for 2013, which together demonstrate a robust year for the sector. Global activity totalled $510.3 billion, a 54% increase on the previous year. TMT has for the first time since 2006 surpassed the energy, mining and utilities sector for deal value over the year, accounting for 23% of total global M&A (14.5% in 2012). It is also of little surprise (considering transactions such as the Verizon deal) that 2013 saw more TMT mega-deals than any year since 2007. Although the Verizon transaction accounted for a significant portion of TMT M&A activity, the sector would still have experienced healthy growth in 2013 had it not taken place (16.6%).
Without the Verizon deal, the telecommunications sector would have experienced growth of 3.8% in 2013 (the transaction accounted for almost 50% of global telecoms M&A). However, given that the sector did secure the largest transaction of the year, growth was 105%.
Although deal volumes were down over the year, the outlook for global TMT M&A is positive moving into 2014. As demonstrated in 2013, TMT is seen as an extremely appealing sector for investment and while developing nations continue to enjoy sustained TMT activity, Europe remains an attractive market for investment (despite continued economic doubt). Ongoing socio-economic uncertainty in Europe is resulting in opportunities for reduced valuations, in turn meaning that expertise is available at a reduced price – which is attractive to investors evaluating acquisition opportunities. Conversely, as economic conditions improve, the attention of more cautious potential purchasers will also be attracted. Ongoing economic difficulty is continuing to lead to pressures on revenues, but these are not necessarily a bad thing when it comes to M&A deal activity; the $16 billion Virgin Media acquisition by Liberty Global demonstrates (along with a number of the other large deals in 2013) that substantial transaction value can be derived from consolidation within the sector.
In summary, although deal volume is suppressed, it is beginning to feel like the sector is enjoying increasing momentum. Research from Knight Frank has shown that TMT firms have been the largest source of prime office demand in London for the third consecutive year (growing by 23%) – another encouraging indicator for the sector.
Notably, the middle market has not enjoyed the same vigorous pace as 2013's mega-deals – amid a third year of overall M&A decline, mid-market deals were down on 2012.
It is evident that the M&A wave predicted by many did not materialise in 2013. Despite an improvement in deal volume in the fourth quarter, the cumulative deal volume over the 12-month period was poor. There is also a contrast to be drawn between activity in the mid-market and the prevalence of mega-deals; the latter is generally impervious to shifting market conditions, meaning that the mid-market is arguably a much better benchmark for overall M&A vitality. With this in mind, the fourth-quarter lift in mid-market activity can be deemed a positive indicator for M&A generally, which – if it continues to extend throughout the first quarter of 2014 – sets an encouraging tone for potential transactions.
Private equity also experienced a sluggish year in 2013 in terms of deal volume (the market mirrored general M&A with an overall reduction in deal activity), but there was a 15% to 20% improvement in global deal value on 2012. This included steady TMT activity, with a few impressive deals. For example, in India $1.2 billion was invested by Qatar Endowment Fund in telecoms company Bharti Airtel. This is the second-largest private equity investment ever in India and was the largest deal in India last year.
The majority of 2013 private equity activity in the telecoms sector was in the mid-market (and a mixture of both investment and exit activity). For example, in early 2013 Webhelp Group acquired Scottish call centre company HEROtsc at an estimated value of £80 million; in addition, Orange Australia and GTS were both sold, with the GTS deal being valued at almost $550 million. The steady growth in private equity-financed deals in the TMT sector overall is said to have been driven by several factors, including lower interest rates, activist shareholders and the seizing by private equity firms of opportunities that many corporate buyers allegedly failed to consider.
Already this year, and in the telecoms space specifically, there are promising signs of increased M&A activity. Lenovo Group has acquired Google's Motorola handset division for $2.91 billion and Chinese firm CITIC Capital also led on the acquisition of telecoms software company AsiaInfo-Linkage for $900 million.
Examples of confidence in the market generally (and specifically in the TMT sector) are becoming more readily identifiable. Google recently acquired Nest at a value of $3 billion, which compares substantially to its largest acquisition in 2013 (Waze, for $970 million) and sets an optimistic tone for TMT activity in 2014.
As already indicated, the much-lauded 'post-crisis merger wave' has not materialised as some had predicted. However, in the TMT sector signs are positive for 2013's fourth-quarter increase in momentum to continue through to 2014. Vodafone is allegedly eyeing a move into UK broadband and television, purportedly with collaborative interest from BskyB, and several significant deals in the telecoms sector are already predicted over the next two years (eg, the sale of T-Mobile USA to DISH Network and the long-anticipated France Telecom and Deutsche Telekom merger). Recent research has even suggested that up to one-third of global companies are considering a sale over the next two years. With a swelling pot of capital burning a hole in the pockets of many TMT behemoths, conditions certainly seem favourable for a positive year in the sector.
For further information on this topic please contact George Gray at Eversheds by telephone (+44 20 7919 4500), fax (+44 20 7919 4919) or email (firstname.lastname@example.org). The Eversheds website can be accessed at www.eversheds.com.