Macro Trends Impacting M&A Across the TMT Sector
Driven by the Ukraine-Russia crisis, rising interest rates and the risk of a recession – is impactive transactional activity globally.
A traditional economic model which addresses inflation by raising interest rates would suggest that debt financing would become more expensive, making high multiples in acquisitions more difficult to achieve in a cost-effective manner. As buyers’ cash costs more, sellers’ deal prices go down, and the M&A market could slow. However, finance markets may be able to absorb a fair amount of rate pressure before M&A financing becomes expensive enough to impact the market.
For the TMT sector, traditional banks may not always be the main finance providers. Private equity, hedge funds, family offices, sovereign wealth funds and other investors all contribute enormous amounts of capital to M&A markets and may be able to continue lending at low rates and absorbing thinner margins.1
Environmental, Social and Governance (ESG)
ESG commitments are changing the way TMT companies are valued. Investors are assessing ESG ratings with increasing scrutiny, directly impacting investor appetite.
With shareholders and regulators scrutinizing a company’s ESG practices, it’s important to understand as many risks as possible in order to accurately assess and maximize the overall value. ESG risks take different forms, and failure to disclose an environmental or social issue, or a difference between commitment and action, creates a risk of litigation post-transaction. Identifying risks is becoming increasingly complex. The Task Force on Climate-Related Financial Disclosures (TCFD) is starting to demand a higher level of risk visibility – within the organization itself and throughout the supply chain.
Due diligence around environmental and climate change policies can mean acquiring the future costs of any carbon emissions, but ESG refers to more than climate change. Driven by the prolonged social isolation and increasingly remote working models, emphasis on human-capital issues has put an organization’s culture, workforce and social component under the spotlight. Issues including employee engagement, loyalty and wellbeing, corporate purpose and overall workforce resilience are now playing a part in the M&A due diligence assessment. Social due diligence needs to include visibility across areas like wage rates, diversity, avoidance of child or forced labor, or a company’s health and safety track record.