The German technology, media and telecommunications (TMT) sector had another year of record high deal volume for German assets in 2023. However, as in 2022, there was a significant fluctuation in deal activity throughout the year. H2 saw about 20% fewer deals compared to H1 2023.
In terms of individual sectors, technology M&A activity increased to a record of 665 transactions in 2023. Media and Entertainment deal volume decreased ~20% to 46 deals and Telecommunication deals stood almost stable at 22 transactions in 2023, at a much smaller deal value, due to a lack of large-cap cellular tower deals that appeared in 2022.
While geopolitics and the interest rate environment slowed M&A activity, the long-term fundamentals for the technology and telecom subsectors became even stronger throughout 2023. With the recently accelerated adoption of AI across industries, the demand for products and services not only in the immediate AI space, but also in enabling technologies such as big data/cloud, high-speed network connectivity, and digitalisation in general is becoming stronger and continues to attract investors.
Deal Volume
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Gerald Schustereder
Partner Deals, Technology, Media and Telecommunications (TMT) at PwC Germany
Tel: +49 89 5790-5541
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Technology
Software
Within technology, software made up for almost 70% of the deal volume in 2023. This category is dominated by vendors of packaged software solutions. While most of the transactions were comparatively small, there were also some medium-sized deals, such as the ASAP Group, a provider of automotive software, that was sold to India's HCLTech for EUR 251 million. There were also some large-cap deals involving publicly traded companies in 2023. SUSE and Software AG were taken private by EQT and Silver Lake. And Thoma Bravo is pursuing a public-to-private transaction with EQS, which has the support of the EQS board. Due to the importance of software to the economy and its attractiveness to investors, we expect this dominance to continue. Financial investors are particularly interested in the sector, accounting for >70% of the software deals. Foreign software companies also continue to attract the interest of German corporates. The largest acquisition was Deutsche Börse's purchase of the publicly traded Danish software firm SimCorp for EUR 3.89 billion.
IT services and data centre
M&A activity in the IT services sector has also been quite active, with a significant proportion of deals in the IT hosting sector. A major transaction in this field was the IPO of the United Internet owned website and server hosting firm Ionos. Data centres appear to be one of the major deal drivers in the coming years, particularly in terms of deal volume. A number of deals and growth investments have been announced in 2023, such as the raising of funds by Mainova WebHouse and the Akquinet data centre divestment. As cloud services continue to thrive, EDGE gains importance, and AI applications supercharge the need for data centres, this industry will likely see a larger number of investments in the years to come.
Semiconductors and hardware
There were also several M&A transactions involving German semiconductor and hardware assets, such as the sale of Elmos Semiconductor's fab, which was widely discussed due to regulatory restrictions, and Elatec GmbH, which provides NFC solutions, including access control systems. Germany's largest semiconductor company, Infineon, successfully acquired GaN Systems, a Canadian manufacturer of high-power gallium nitride transistors. It also sold its HiRel DC-DC converter business, including its hybrid and custom board-based power products, to Micross Components. Further smaller acquisitions are on the agenda for the future.
Artificial intelligence, metaverse and cyber security
AI and metaverse deals involving German assets are not yet significant in terms of numbers, but are expected to increase. German firms have been participating in deals as buyers; for instance, the enterprise software firm SAP placed three investments in generative AI market leaders Aleph Alpha (Germany), Anthropic (US) and Cohere (US/CA) after disposing Qualtrics for USD 12.5bn. Consolidation in the German and wider European cybersecurity market is also expected to become a key sub-sector for deals once the broader M&A market picks up again.
Media and Entertainment
On a global level, the media and entertainment industries are undergoing major changes, e.g., streaming players pivoting from a pure growth phase to a profit prioritisation and possibly consolidation phase. Or video gaming and online gambling gaining an increasingly broad customer base and targeting individuals more precisely now with offers and advertisements, which increases the value of every customer. The German industry structure is more focused on traditional media assets. However, with the music streaming platform SoundCloud there is one large streaming player deal in Germany on the horizon, possibly at a valuation north of one billion Euros.
The most anticipated German media deal is the sale of the marketing rights of the German football leagues to financial investors. After several approaches that did not meet with the approval of the member clubs, the process is on track to be completed in early 2024. The portfolio optimisation and restructuring of print publishing firms, including Bertelsmann's Gruner+Jahr, also received a lot of press attention. Further, Holtzbrinck sold Springer Fachmedien München GmbH, a Munich-based book publisher, to Unigestion. In the meantime, the market-leading rainbow press publication BILD announced a significant internal restructuring, reducing the number of localised editions and replacing a substantial portion of staff with AI technology. It is likely that traditional print publishing will continue to decline as social media compete for consumers' attention.
Furthermore, ProSiebenSat1 Media SE has seen a continued stake increase by the Italian MFE-MediaForEurope NVand Czech Republic-based PPF Group NV. Several smaller transactions in the Media industry include ad agencies, printing services, and movie (post)-production firms.
With many live events and concerts sold out and trade fairs and cinemas full, the live events industry could gain significant ground and recover from the complete shutdown during the coronavirus pandemic. However, consumer spending is dependent on macroeconomic developments, which are currently seen as uncertain.
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Telecom
After the sale of Deutsche Telekom’s cellular towers and Vodafone’s Vantage Towers divestment to financial investors in 2022, there were no other cellular tower deals of that size in Germany in 2023. However, we did see the onboarding of UniSuper as an additional investor in Vantage Towers and the sale of the German unit of Novec to Phoenix Tower International. Also, the owner of the third largest telecom firm in Germany, Telefónica, made a public offer for the 28% of shares not held by the parent company for around EUR 2 billion in cash. This move followed a massive devaluation of the German subsidiary after its largest resell client, United Internet, ended its partnership with Telefonica. Another major event in the German cellular infrastructure market is the launch of United Internet's 5G network. However, as the operator's installed base is still small, it relies heavily on roaming partnerships with existing operators.
On the back of the general shift of focus to margins, German fibre infrastructure investors also changed their strategy from a race to participate in the fibre build-out at high prices to a consolidation play. The highly profitable fibre extension opportunities are becoming increasingly harder to find, with the cost of labour and material and the cost of capital rising. However, as there are many subscale players in the market and the operational efficiency of various players is diverging significantly, there is financial pressure for subscale players on the one hand and value creation potential for buyers on the other. This combination triggered the start of a consolidation movement last year. The lack of financial viability led to several assets filing for bankruptcy. These include HelloFiber, the JV of InfraVia Capital Partners and Liberty Global, KKR- / John Laing-backed Glasfaser Direkt, and the local utilities owned HeLi NET Telecommunications. More recently,Deutsche Giga Access sold network infrastructure to Westconnect in order to avoid a possible insolvency. We expect the environment for sub-scale players to remain challenging in the near future. At the same time, larger and well-funded players continue to develop their fibre networks.
Besides fibre development, we expect full-service telco operators, to continue investments in higher growth and margin technology businesses through capability-driven bolt-on acquisitions, which could be observed globally. While telcos’ traditional focus for side-businesses was TV, this became an increasingly difficult and low-margin space, with international streaming players gaining market share rapidly. Therefore, IT services fields such as cloud, data analytics, and cybersecurity are increasingly popular among telcos and remain strong candidates for consolidation plays. Globally, some telcos are venturing into even less telecom related fields, such as financial services, e-commerce, or digital healthcare.
Market outlook
There are several factors that pose significant uncertainties for the markets. These include the geopolitical conflicts which are not expected to be resolved in the short term. A timely start to central bank rate cuts is widely expected, but not certain. Macroeconomic forecasts from major institutions vary widely. This proliferation of uncertainty factors may well keep general deal activity subdued. The US presidential election at the end of 2024 could also dampen deal activity. On the other hand, investors can only put M&A activity on hold for so long. Strategic investors need to place their bets before competitors buy up scarce capabilities. And financial investors are under increasing pressure to liquidate existing investments and deploy new capital.
For now, we can say that PE buyers have become more margin-focused and conservative with valuations despite large amounts of dry powder. In the short term, we are likely to continue to see regular gaps between buyer and seller price expectations. However, in the medium term, as macroeconomic developments become clearer, we expect deal activity to pick up significantly to compensate for pent-up M&A demand. One area where we expect to see fewer deals for longer, however, is in assets of significant national interest, particularly with Chinese buyers, due to growing concerns about security and independence.
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Global Leader Entertainment & Media, Partner, PwC Germany
Tel: + 49 211 981-5848