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November 2022 / 5 Min Read

Driving the Deal: Transaction Risks and Opportunities for the Technology, Media and Telecommunications Sector

 

While new pressures are driving value creation, evolving challenges are making deal structures increasingly complex.

 

Key Takeaways

  1. Deals are increasing in complexity and the risks are evolving at multiple stages of the deal cycle.
  2. From quantifying digital performance, to uncovering and addressing cyber vulnerabilities, preparing for a digital future is critical.
  3. M&A gives organizations opportunities to refocus on talent, deliver strategic financial benefits and drive real change.

Intellectual property (IP), environmental, social and governance (ESG) and cyber are now driving value creation as well as making the deal structure more complex. The risks are evolving at multiple stages of the deal cycle.

‘Going-Public’ Risks

Whichever transaction route is selected, assessing IP value and digital risk is essential if an initial public offering (IPO) is the chosen route. The likelihood of IP litigation increases by 220 percent when a company decides to embark on an IPO, and when an organization has experienced three lawsuits per year prior to its IPO, it will lose 1.25 percent of its market value to litigation each year.1

Undervaluing Intellectual Property at Deal Stage

Detailed assessments of digital performance are often part of the process of valuing a company’s IP. Like plant and property, a company’s IP (including its data, source code, algorithms and other assets) can be assigned a monetary value. IP valuations can be used to secure loans or other financial benefits if the IP collateral is insured. Termed IP financing is increasingly seen as a viable option for companies to raise capital without diluting their equity stakes. Insuring the collateral gives lenders confidence that the IP has been given a fair valuation.

The Digital Future

There was an accelerated move towards digital during the pandemic, which reinforces the vital relationship between technology and competitiveness.

With digital so central to how businesses operate and drive revenue, buyers need to evaluate the digital assets and capabilities of the companies they have in their sights for acquisition. It’s important to assess how much is manual, how much is automated, and if improvements to efficiencies can be made.

Buyers and sellers should quantify digital performance and assets to ensure their scalability to support growth and resiliency. A forensic examination of the company’s technology operations to gauge the resilience of its platforms is critical. Digital performance assessment should take in a company’s digital KPIs, including the number of active users, platform performance and scalability to achieve business forecasts across existing and future digital channels.

The existence of any fraudulent interceptions needs to be monitored, and the quality of the company’s source code should be evaluated for IP infringement and maintainability. Businesses are bought to be grown and scaled up, so their systems must be capable of handling more activity.

Uncovering and addressing cyber vulnerabilities is the other critical component of a digital assessment. Cyber risks must be identified and managed ahead of transactions, as insuring these risks is becoming more difficult.

The cyber-risk radar is constantly moving and uncovering technology weaknesses or vulnerabilities during due diligence which could lead a potential buyer to walk away.

70%
Digitally-enabled business models will account for an estimated 70 percent of new value created in the global economy in the next 10 years, according to the

Source: World Economic Forum

Strong demand from corporate buyers for W&I insurance across most deal sizes

 

Opportunities Through M&A – The Top Three

Despite the rapidly changing risks, M&A remains a catalyst for change, enabling organizations to evolve their business models and grow in a digital world.

  • A Catalyst for Change. Due to the rapid pace of change in the industry, many TMT organizations recognize that they might have an outdated operating model to meet the changing demands of the sector today. M&A forces a business to rethink its operating model and presents an opportunity to assess its operations to become more relevant to the future trading environment.
  • Making Savings, Delivering Value. M&A helps organizations deliver on short-term goals and more strategic financial benefits, including rationalization, head office synergies and procurement savings. If managed well, efficiencies can make the combined organization more competitive, and the revenue benefits can also drive improvements in market share.
  • Talent Refocus. M&A has the potential to provide new opportunities to retain top talent and acquire new skills and leaders via the integration process, leaving a business with a refreshed leadership team and a more engaged workforce.

1 Baker Tilly 2021

 

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