Media and technology companies are focused both on the quality and quantity of their content, and on how to distribute—and therefore monetize—what they have created. These twin-track priorities are reflected in the most popular sub-sectors of the industry for dealmaking. As
Figure 2
shows, three of the top five priorities for M&A cited by respondents to this survey—digital media services, digital content creation, and digital publishers—are content-driven activities, while the other two—advertising/marketing technology and digital video distribution—are distribution-focused.
This is not to say that emerging technologies are not of interest to dealmakers. As the chart shows, there is significant attention being paid to a very broad range of developing trends, from the Internet of Things to wearable technologies, and from artificial intelligence to augmented or virtual reality.
Collectively, these emerging segments are set to account for a large chunk of M&A in technology and media; more than half the respondents in this research (52%) cited emerging technologies, in aggregate, as one of three most attractive areas of the industry for a deal. “We want to invest in companies that will help us improve our business,” says the chief strategy officer of a Chinese company. “We are looking to develop further, diversify our revenues, improve our security and exploit new opportunities.”
M&A is clearly an important strategic tool for many participants in the media and technology sectors: As
Figure 4
shows, more than half the respondents (51%) are looking for deals in order to enter new market segments, while almost as many (47%) cite their desire to acquire strategic technology and patents. Often, deals are viewed as a way to get an edge on competitors—more than a quarter of respondents (28%) are interested in M&A that would enable them to be first into an emerging market or segment.
Emerging technologies: One of the most attractive segments in the industry for a deal.
Emerging technologies (including IoT, live streaming, wearable technology, artificial intelligence, augmented reality/virtual reality/mixed reality, eSports, and drone technology)
On which areas of the digital media and frontier technology sectors will you focus most of your M&A targeting?
One good example of a deal where several of these motivations were drivers is Samsung Electronics’ US$250M purchase last year of LoopPay. The deal gave Samsung a strong platform in the electronic payments market, with LoopPay’s contactless technology, and a portfolio of intellectual property. Or look at Hitachi Data Systems’ US$600M deal to buy Pentaho, a transaction that has put the multinational company at the forefront of big data, set to be a crucial market over the next decade. Other important deal drivers include the desire to utilize available cash or cheap funding—reflecting the low interest rate environment that dominates much of the global economy—and the need to diversify revenue sources, which is important in industries where the pace of change is often relentless.
Nevertheless, the consistent theme among respondents is a desire to be “first in the game”—to have first-mover or market leadership advantage in a particular segment or market. The chief strategy officer of a U.S. organization explains: “The market is changing and there is a need to invest in new segments in order to help us diversify – we need to increase market share and penetrate deeper across the market.”
That is understandable given the rewards that have accrued to first-movers in many areas of technology and digital media in the past. However, it is also something of a risky strategy, with trailblazers in these industries regularly coming unstuck. In short, many M&A deals represent a gamble that may not pay off. There are plenty of examples of both. Facebook’s US$2B bet on virtual reality device-maker Oculus Rift in 2014 has shown promise—since then, Oculus has driven the growth of an entirely new ecosystem of VR investors, creators, and consumers. Another lauded deal is
Amazon’s US$970M acquisition of eSports platform Twitch
, which had an estimated 100 million unique monthly users in 2015.1 By contrast, Yahoo paid US$1.1B for Tumblr, but this year had to write down US$482M of its value; it has consistently struggled to work out how to monetize the company.
Figure 2: Where dealmakers are planning to target M&A
On which areas of the digital media and frontier technology sectors will you focus most of your M&A targeting in the next 12 months?
Regional breakdown
Gaming + publishing hot in China
In large part, respondents from different global regions share similar strategies when it comes to sub-sector targets. However, several noteworthy distinctions can be seen. Chinese acquirers, for instance, expressed less interest in advertising/marketing tech (20%) and digital content creation (16%), and relatively more focus on digital publishing (36%), gaming (24%), and live streaming (20%). “We want to improve our gaming services and take advantage of the growth in this sector,” said the CFO of a major Chinese media firm.“We also plan on investing to improve our security and make our overall platform perform better, as well as to reduce risks of piracy.”
Chapter 1: The Digital Frontier
Figure 3:
On which areas of the digital media and frontier technology sectors will you focus most of your M&A targeting in the next 12 months?
Figure 4: Why dealmakers are seeking M&A
What are your primary motivations for seeking M&A deals in the digital media and frontier technology sectors?
Entering new market segments
Acquiring strategic technology and patents
Seeking first-to-market status in an emerging segment
Utilizing available cash, stock or cheap credit
Positioning for market leadership
Diversifying revenue sources
Increasing monetization capabilities
Acquiring content distribution platforms
Acquiring data (analytical, business or consumer)
Acquiring audience and market reach
Entering new geographies
Sending a signal to the market (e.g., regarding strategic positioning)
Acquiring content pipeline
Improving mobile functionality
Competition migration
Positioning for an IPO
Vertical integration
Seeking inorganic revenue growth
Obtaining human capital
Regional breakdown
US + European acquirers seek new markets
US and European acquirers tend to be most interested in entering new market segments, with 50% of US respondents citing this as vital and 56% of European respondents saying the same. Chinese buyers, on the other hand, are more interested in acquiring strategic technology and patents (48%), as well as diversifying revenue sources (28%) and sending a signal to the market (20%). “Investing in this sector is profitable—it is a very fast-emerging sector, and investing in startups helps us acquire new technologies and patents,” said a managing partner of a German venture fund. “It also enables us to expand into new markets and market segments that are growing quickly.”
Such possibilities are reflected in the risks that dealmakers in technology and digital media perceive as most serious when considering M&A. As
Figure 6
shows, almost half the respondents (45%) cite the fear of getting it wrong when they’re assessing the importance or potential of a particular technology. Similarly, more than a third (37%) fear they may misjudge the growth prospects of a target company. More than a fifth (22%) point to the dangers of investing in a dynamic and developing marketplace.
These fears underline the challenge posed to businesses conducting M&A in digital media and technology, for they must also contend with more traditional deal risks. More than a third (35%) point to difficulties around legal or regulatory issues, for example, while 29% fear they may not come to grips with the details of target companies’ markets.
The risk of a cultural mismatch is also a major concern, cited by 34% of respondents. This may be a particular fear for larger companies making smaller acquisitions, where the possibility of a clash between a major corporate organization and a more entrepreneurial startup business is very real. Valuations are also a concern for a significant number (21%) of respondents; given the boom of the past few years, the fear of overpaying is likely to be well founded.
Often, many of these risks are over-linked. “Wrongly evaluating a company’s potential can be really detrimental to our business and is expensive because these organizations are highly valued and there are many competitors looking to invest,” says the director of strategy at a U.K. business. “Plus regulation, especially in the European Union, has been making our lives tougher.”
Case study
Creating a game-changing digital strategy
In high-stakes situations, it is necessary for a company to ensure that it is putting its best foot forward both in performance and in strategy. This is especially the case when a company is looking to attract a sizeable investor and position itself to be acquired. So, when a highly regarded production studio sat down at the table with a large media conglomerate to discuss the opportunity for investment, they were surprised to learn that their proposed valuation was significantly lower than expected. When they asked why, they were told their future growth plan was missing a digital strategy. After receiving this feedback, the company engaged Manatt Digital to develop a digital strategy and plan to enhance their overall enterprise value. Our team rolled up our sleeves and in four weeks, developed and recommended an authentic digital strategy and roadmap toward monetization of digital-first content, as well as strategic messaging and positioning. We provided our guidance and recommendations, as well as content for the investor pitch deck that helped our client articulate their digital approach to strategic partners and the marketplace. As of September 2016, our client had implemented our recommendations and was closing on an offer that far exceeded their initial valuation.
Figure 6: The risks of M&A in digital media and technology
What are the biggest risks/challenges when considering M&A deals in the digital media and frontier technology sectors?
M&A hunting grounds
Where are dealmakers looking for M&A targets and what type of company are they most interested in finding? In geographical terms, as
Figure 8
shows, while almost every business is eager to pursue deal opportunities in their own markets, the appetite for cross-border M&A has slowed somewhat, and particularly so for global deals. That may reflect a variety of factors, including the relatively fragmented nature of digital media and technology, the current volatile macroeconomic and geopolitical climate, and the elevated risk of cross-border deals, given the already considerable challenges to M&A.
Regional breakdown
European firms wary of regulation
For European buyers, the biggest challenge in media and technology deals is legal and regulatory issues (48%). Indeed, European Union regulators have shown themselves to be some of the toughest in the world when it comes to companies in these sectors, bringing landmark cases against the likes of Google and Apple in recent years. Chinese purchasers are also concerned with regulatory problems (36%) as well as high valuations (36%). “When investing in the US, Japan and Korea, rules and regulations change quickly and this makes it difficult for us to carry out investments,” said a managing director at a Hong Kong-based private equity firm. “Many times companies in this sector are also highly priced, and this can make it risky and expensive to make acquisitions.”
of respondents who target frontier tech acquisitions are concerned about legal issues when doing M&A deals. For comparison, just 31% of respondents with a digital media focus cite legal problems as a serious risk. One partner at a venture capital fund with a diverse range of technology investments explained that regulatory issues can be especially thorny in cross-border deals. “When you’re working in a foreign jurisdiction, there are always differences in the regulatory environments,” the VC partner said. “These can be time-consuming to fully understand and to cope with.” Another respondent, a partner at a Hong Kong-based private equity firm, said that it had become “difficult to invest in new regions” due to stringent legal requirements, as well as regulators that “scrutinize investments very closely.”
Sub-sector M&A spotlight
Digital media
The digital media world has seen an abundance of intriguing deals so far in 2016, across various segments and valuation levels. Overall, there were 269 media deals of over US$5M in value in the first half of 2016, worth a total of US$45.2B, according to Mergermarket data.
One of the central trends in dealmaking has been the transformation of traditional media companies toward building and growing out their digital assets. For instance, in early September, newspaper giant Gannett announced an investment in social media company Digg, reported to be in the seven figures. At the same time, native digital companies are attracting increasing amounts of funding. For example, Defy Media, holder of web franchises such as Smosh and Screen Junkies, attracted US$70M in series B funding earlier this year.
One other interesting trend has been U.S.-U.K. cross-border deals. In September 2016 alone, there were three such deals—despite the uncertainty bred by Brexit—including U.K.-based Informa Group’s US$1.5B purchase of U.S. communications company Penton Media.
Frontier technologies
Digital segments that sprang up just a few years ago, such as artificial intelligence and virtual and augmented reality, are quickly becoming highly sought-after. One of the most popular of all has been virtual and augmented reality. According to data from CB Insights, venture funding to the segment had already surpassed the 2015 total by 85% in July 2016. This was led by Magic Leap’s US$793M series C fundraising in February.
It’s not just venture capital investing in these categories either. Software maker has purchased three artificial intelligence firms in just the past two years: deep learning companies MetaMind and PredictionIO, as well as smart calendar producer Tempo AI, all for undisclosed sums.
Digital health + wellness
The healthcare industry continues to see a boom in activity due to demographic trends, and digital health is receiving increasing infusions of investment dollars. In Q1 2016, venture funding to the segment rose 13% to a total of US$981.3M, according to Rock Health. Significant recent deals have included a US$175M series C round for oncology software maker Flatiron; a US$95M growth equity raising by information provider Healthline; and One Medical Group’s US$20M acquisition of nutrition app maker Rise Labs.
The number of sub-segments within digital health is growing as well. In addition to traditional spheres such as big data and wearables, artificial intelligence tools are beginning to be given serious attention. More than 50 AI-focused medical startups have raised their first equity round since the start of 2015 alone, according to CB Insights.
Gaming + eSports
The gaming sector has seen a major influx of funding, as new mobile franchises emerge and segments such as eSports gain in popularity. Tencent Holdings made an ambitious bet in June 2016 with its US$8.6B purchase of Finland’s Supercell Oy, maker of Clash of Clans. Another recent deal saw Microsoft’s Xbox unit acquire Beam, a live-streaming eSports service, for an undisclosed sum in August 2016. Chinese companies have shown especially strong interest in gaming targets, even when the acquirers are not in the gaming business at all. Take the case of Leyou Technologies, a Hong Kong-listed company that has a large number of chicken farming assets in China. Recently, it also began buying firms such as Splash Damage, a British video game developer, for which it paid US$150M.
As for size, many participants in M&A in digital media and technology appear to be agnostic –
Figure 10
reveals that almost two-thirds of respondents (61%) do not target deals of a particular size. In other words, they are focused on the nature of the opportunity rather than its scale. Among the 39% of dealmakers that do prefer to target a certain deal value, the focus is largely on small- to medium-size companies,
Figure 9
suggests, though not necessarily the very smallest companies of all. “We prefer to invest in companies that have been around for a while,” says the managing director of a U.S. private equity firm. “We want to see how well they have been able to perform and what that might mean for our investment.” In many ways, this is understandable—the smaller the business, very often the larger the risk. Given many respondents’ fears of getting the deal wrong, a strategy of avoiding the minnows of the sector makes sense. On the other hand, the risk is that by waiting for a company to scale up before considering an acquisition—to prove it is less of a risky bet, in other words—dealmakers will see one of their rivals move in more quickly. Valuations for larger businesses with more established track records are also likely to be more heady.
Figure 11
charts respondents’ views of high-risk deals in a slightly different way but with similar results. Of the roughly one in two respondents (54%) that tend to look for businesses at a particular development stage, less than a quarter (24%) are targeting early-stage startups. Close to half (45%) prefer established startups aged between two and four years, while almost a third (31%) want even more mature businesses.

This is a difficult trade-off for dealmakers to get right. Startup businesses are dogged by high failure rates, particularly in industries such as digital media and technology, where it is notoriously difficult to assess market trends or to separate the winning technologies of the future from the also-rans. Yet some dealmakers may take the view that they only need one or more of these very early-stage investments to provide a mega payday in order to more than compensate for potential losses on other deals. “It is the startups that have the technologies with potential to really disrupt the market,” argues the chief financial officer of a U.S. business.
Regional breakdown
Scandinavia heads the list of favored destinations
While many dealmakers in the digital media and technology sectors are reluctant to pursue international transactions, those that are considering cross-border M&A are eschewing the more obvious markets of the US and India in favor of other destinations. Most strikingly, as
Figure 12
shows, Scandinavia is a target for 49% of respondents considering an overseas deal.
This may reflect the advanced adoption of certain technologies in the region. For example, Sweden and Denmark now lead the world in terms of
moving toward a cashless society
. The region has also seen the emergence of startup businesses that have gone on to become global champions—Nokia, Ericsson, Spotify and Skype are just some of the examples; the hunt for their successors may be one reason why Scandinavia is a favored destination.
Last year, for example, saw China’s Tencent pay US$8.9B for Finland’s Supercell, maker of the popular Clash of Clans game. In the same sector, the U.S. gaming company Activision Blizzard picked up Sweden’s—best known as the maker of Candy Crush—for US$5.9B. Some deals in Scandinavia were smaller—for example, Germany’s Nemetschek paid US$49M for software sector peer Solibri of Finland, while Gravity4 of the U.S. acquired Conyak of Denmark for US$29M in an internet market and advertising tie-up.
As for the U.K., the fact that the country is the second most popular destination cited by respondents will reassure those who feared the Brexit decision, in which the U.K. voted to leave the European Union, would deter overseas investors. The U.K.’s burgeoning financial technology sector—the world’s most important by
some measures
—is one obvious attraction. The purchase of London-based payments technology specialist VocaLink by MasterCard, a US$871M deal, is just the latest transaction in the U.K. fintech sector.
Meanwhile, in the U.S., which is home to the world’s largest digital media and technology industries, the comparative lack of appetite for M&A among international investors may be explained partly by the
high valuations on which U.S. businesses in these sectors now trade
after a sustained period of dealmaking. The high level of competition from domestic investors is also likely to be a significant factor.
Figure 12: Focus of digital media and frontier technology M&A targeting
If you do cross-border deals, in which regions/countries do you expect to focus most of your digital media and frontier technology M&A targeting in the next 12 months?
Figure 5:
What are your primary motivations for seeking M&A deals in the digital media and frontier technology sectors?
Figure 7:
What are the biggest risks/challenges when considering M&A deals in the digital media and frontier technology sectors?
Figure 8: Domestic M&A suits more dealmakers
In terms of geography, how would you categorize your most frequent transactions in the digital media and frontier technology space?
Regional (target based on same continent)
Global (target based on different continent)
Figure 9: Dealmakers seek small to medium-size targets
If yes, which range(s) of deal value do you typically target?
Figure 10: Does size matter?
When considering potential digital media and frontier technology acquisitions, is there a specific deal value that you target?
Figure 11: Startups less popular
At which development stage(s) are the digital media and frontier technology companies that you typically target?
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