The impact of the pandemic on technology and innovation is tremendous and partially explain why the TMT industry became of the fastest-growing and most sought-after targets for investment bankers and private equity firms.
In this article, we provide a general review of the TMT sector, its advantages and disadvantages for investors, the main trends, and drivers.
TMT industry overview
To start, what is the TMT meaning? TMT stands for technology, media, and telecommunications and implies an area of business that focuses on new technologies.
These three industries are united into one because companies functioning in TMT are interconnected. However, as the sector is so broad and diverse, it’s divided into several subsectors.
Tech companies develop equipment and deliver services that help customers consume content and do business or personal tasks.
- IT services
Outsourced software development and staffing companies provide tech support to other businesses. Examples: Accenture, IBM, Tata Consultancy, Fujitsu.
Software firms develop and distribute various forms of software. Examples: Microsoft, Adobe, Salesforce.
Hardware companies manufacture a broad range of equipment packed with the latest technology. It may include anything from a mobile phone to a home appliance like a refrigerator. Examples: Apple, Dell, HP, Huawei, Samsung, Lenovo, Xiaomi.
Internet companies can do anything from e-commerce to social networking. Examples: Apple, Amazon, Google, Meta, TikTok, Microsoft.
The semiconductor industry includes companies producing semiconductor devices, like transistors or graphic card chips. Examples: AMD, Intel, Qualcomm, Nvidia, Texas Instruments.
Media and entertainment sectors
These are content production companies and professional services firms that primarily generate income through advertising and subscription-based services.
Companies providing advertising and marketing services. Examples: WPP, Omnicom Group, Publicis Groupe, Deloitte Digital.
Television broadcasting companies and radio stations. Examples: Entertainment Group, Alphabet Inc, Comcast.
Cable and satellite television providers and program distributors. Examples: AT&T, Charter, Dish Network, Verizon.
Books, newspapers, and magazine publishers. Examples: Penguin House, Hachette Book Group, Harper Collins.
- Movies and entertainment
Companies engaged in producing and distributing movies, TV shows, and music. Examples: Universal Pictures, Paramount Pictures, Warner Bros., Walt Disney Pictures.
- Interactive home entertainment
Video games and educational software producers. Examples: Sony, Microsoft, Coursera, Blackboard.
Companies from the telecom industry deliver content through wireless and wireline services.
- Wireless service providers
Telecom companies that offer cellular or wireless telecom services. Examples: T-Mobile US, AT&T Mobility, Verizon, Vodafone.
- Convergent telecom service providers
Telecom firms that deliver voice, data, and video networking services in a single network offering. Examples: Cox Communications, Charter Communications, Cablevision Systems.
- Data centers and infrastructure providers
Telecom groups that provide data centers, cloud networking, storage infrastructure, and web hosting services. Examples: NTT Communications, Telehouse/KDDI, Coresite, Verizon.
Tech, media, and telecom companies produce various types of interconnected products and services. That’s why the same companies can be found in different TMT subsectors.
For instance, Amazon or Microsoft can be considered both internet and software companies. Meta and Netflix can be viewed as either internet or media companies. Another example is Apple which can be regarded as a media or technology company.
Note: if you consider a career in a TMT investment banking, get ready for the interview with the list of investment banking technical questions we provide in our dedicated article.
What is TMT investment banking?
TMT investment banking provides advisory services to customers from TMT — technology, media, and telecommunications industries. A customer base may include both private and public clients and vary from multi-billion dollar industry leaders to small founder-owned businesses.
Investment banks (IBs) normally have TMT industry groups in their investment banking divisions (IBDs). They offer advisory services relative for:
- Mergers & acquisitions (M&A)
- Initial public offerings (IPOs)
- Equity and debt capital raising
- Risk management
- Leveraged finance
- Financing and restructuring
Many investors and PE firms consider the TMT industry to be unstable and volatile because it deals with many tech companies with extremely high, and distorted, valuations.
However as the valuations return to market alignment, TMT continues to be a very promising sector:
- The sector has shown steady growth in terms of M&A deal volume and deal value over the past decade.
- In 2021, even despite the pandemic, the total M&A deal value in TMT reached a record-breaking $1 trillion. This is 30% more than in 2020. Additionally, the total number of deals has also increased by 44% to 996.
- Compared to other industries, TMT is the largest and most dynamic M&A sector today, representing approximately 25% of all M&A transactions.
Note: Learn more about how quantitative funds work in our dedicated article.
Reasons the TMT industry is the leading M&A sector
There are three main factors why TMT companies persevere as leaders in M&A activity.
- Increased digitalization. Because of global digitalization, almost every company in both emerging and developed markets requires powerful and effective tech tools. That’s why many firms tend to acquire tech companies with relevant background and experience to onboard talent and technology instead of developing it internally.
- Increased TMT M&A deals valuation. As TMT company valuations have substantially risen, those companies started to acquire other businesses more actively. It created a virtuous circle where growing valuations in the TMT sector lead to more TMT deal activity. This, in turn, leads to higher TMT valuations.
- Increased interest of PE firms. Private equity sponsors used to avoid TMT companies because of their high valuations, limited traditional assets, and not stable cash flows. However, as they grew more comfortable with the way tech companies earned revenue, activity increased. Thus, the more interested sponsors are in certain M&A sectors, one would expect more stability in deal activity.
Top TMT industry trends and drivers
For clarity, let’s focus on the trends and key drivers of each TMT industry group separately.
- Geopolitics and national security
Previously, tech firms were less regulated. However, after the digital war between China and the USA and accusations of stealing American technology, controls over the sector have tightened significantly. The conflict between China and India, with India banning a total of 321 Chinese apps, has only added fuel to it.
With time, many tech products become less expensive because of more efficient manufacturing processes and more affordable raw materials. However, because of high inflation, tech companies always have to improve their products and services to maintain sales goals.
- Tax and trade policies
As tech supply chains are global, the growth of the technology sector is at the mercy of government policy. It should encourage free trade, fight piracy, and favor large and small businesses.
Media and entertainment
Keeping audience expansion in mind, almost each media company starts rethinking its business model. That’s why they expand boundaries beyond audio and video media and buy businesses that broaden their interests, such as video gaming, fitness, and online gambling.
The technology simplifies the processes related to intellectual property rights. It also helps to reduce problems with duplicate content and plagiarism. Moreover, data stored in a blockchain is much harder to change.
- Artificial intelligence
AI is affecting all subsectors of the media and entertainment industry because it’s effective in predicting user engagement with content. It also helps to understand customer behavior and digital media consumption trends better.
- Process optimization
The telecom industry is very complex and expensive. Moreover, companies have to deal with many competitors fighting for the same target audience. To keep up with the competition and reduce expenses, many companies implement artificial intelligence that allows them to collect data automatically to help improve business profit margins.
- 5G deployments
To improve customer experience and business services, top mobile operators are already on their way to 5G deployments. The number of 5G mobile subscriptions is expected to reach over four billion by 2027.
- Cloud deployments
Many telecom firms offer cloud-based services to complement their traditional offerings. This reduces infrastructure spending, improves customer experience, and helps to adapt to changes in the market.
Pros and cons of TMT investment banking
Let’s focus on the benefits and drawbacks of each TMT sector in investment terms.
Technology investment banking
Technology is considered much more advantageous in comparison with media and telecom banking.
- The deal flow is the highest among industries.
- Tech companies are the most active acquirers in the market.
- A wide variety of exit opportunities include private equity, venture capital, growth equity, and corporate development.
- There are many tedious and time-consuming private placements, sell-side, and cross-border deals.
- The sector is very sensitive to economic conditions, and even top firms can experience recessions.
Media and telecom investment banking
The advantages and disadvantages of media and telecom investment banking are similar, so let’s combine them into one group and compare them with technology investment banking.
- Many debt issuances and constant dealing with restructuring, turnarounds, and spin-offs.
- Better opportunities when investing in emerging markets.
- There are fewer M&A deals, and the main value comes from telecom-to-telecom scale transactions.
- Mega deals are quite rare, which results in fewer exit opportunities.
Let’s summarize the key points from the guide:
- Each of the TMT’s sectors has its subsectors. Technology includes software, hardware, IT services, and the internet. Media includes advertising, publishing, broadcasting, and movies. Telecoms include wireless telecom services, convergent telecom services, and data centers.
- Investment banking divisions offer advisory services in terms of mergers and acquisitions, initial public offerings, capital raising, financing, and restructuring.
- TMT group is the leading M&A sector because of the acceleration of digitalization and increased M&A deal valuation.
- The main technology industry trends include geopolitics, national security, and inflation. Media trends include expanding, blockchain, and artificial intelligence. Telecom trends include process optimization, 5G, and cloud deployments.
Technology investment banking is more advantageous in comparison with media and telecom because the deal flow is the highest among industries, and there are more exit opportunities.