Clifford Chance

Over-regulation and protectionism curb M&A in the TMT sector as investors seek opportunities in high growth markets

Clifford Chance survey identifies top drivers and risks for growth through M&A across an increasingly complex global landscape

London June 14, 2012 – Nearly half (47%) of respondents to Clifford Chance's Cross-border M&A: Perspectives on a changing world survey from the technology, media and telecoms (TMT) sector are focusing their M&A strategy on high-growth economies, rather than domestic (20%) or global developed markets (33%).

The research, which was conducted by the Economist Intelligent Unit on behalf of Clifford Chance surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the TMT sector.

TMT M&A Confidence

The survey found that TMT companies appear notably more confident than other sectors about their ability to navigate risks associated with cross-border M&A. When asked about their organisation's management of a range of risks (due diligence, cultural integration, regulatory risk, political risk, financial risk and macroeconomic risk), TMT respondents rated themselves as effective or highly effective more often than any other industry across every type of risk.

In terms of drivers for M&A activity, TMT respondents cite staying ahead of competition as the number one factor at 40%, higher than any other sector. Features associated with global expansion topped the list of risks and/or barriers to global M&A in the TMT sector in the next two years, with currency fluctuations, political uncertainty and increased competition taking the top three spots. Company own cash reserves featured as the clearly predominant source of funding for deals in this sector, at 45%.

In addition, a number of significant themes in the TMT sector emerge from the survey findings:

• Red tape and protectionism – when considering which political factors give them greatest concern in terms of cross-border M&A activity over the next two years, TMT respondents selected protectionism and political uncertainty, both at 31%, ahead of poor protection for foreign investors at 23%. On the domestic stage, over-regulation is seen as the biggest political concern in the sector.  In terms of pure legal/regulatory risk, employment laws, followed by financial regulation, are seen as the biggest legal/regulatory issues for TMT organisations when considering M&A opportunities.
• Shareholder pressure is identified by the survey as a driver for pursuing cross-border M&A activity. TMT companies in particular note that shareholders are increasingly influential over their M&A strategy, with 60% of respondents from the sector confirming it has grown in the last two years. This is higher than in any other sector.
• Joint ventures to manage risk and cost – respondents in the TMT sector are placing more importance on joint ventures than in previous years. Some 45% of respondents place joint ventures in the top three deal structures they would be most likely to pursue now in cross-border transactions, compared with 34% two years ago, and materially more than traditional M&A.
• Growth markets feature higher than expected in the top ten attractive destinations for M&A in the sector. When asked which markets they consider to be prime targets for M&A opportunities, North America and China tie as the top two prime destinations for M&A activity in the TMT sector, followed by the UK and Brazil. Perhaps unsurprisingly, the emerging markets are seen as risky destinations for M&A: 29% of respondents name Russia as the riskiest destination followed by 24% for China and 22% for sub-Saharan Africa.

Commenting on the results of the survey from the sector's perspective, Clifford Chance's global head of TMT, Joachim Fleury, said: “The survey raises a number of interesting issues the TMT sector is facing as it continues to pursue a strategy of growth by M&A. In particular, companies in the sector are finding their efforts increasingly impeded by antitrust and competition rules. Google's buyout of Motoral Mobility was a case in point - after obtaining antitrust approvals in the EU and the US, uncertainty over the timing and possible conditions of clearance in China delayed the transaction by several months.

However, the survey reveals that there remain real opportunities for M&A – both in developed and emerging markets.  For companies that can navigate the risks effectively, the prospects look good." Fleury concludes.