Technology, Media, and Telecommunications (TMT)
What is the TMT Sector?
The Technology, Media, and Telecommunications (TMT) sector refers to companies that are focused on new technologies. Most of these companies rely extensively on Research & Development (R&D) and exhibit rapid company growth. As a result, you see a lot of growth investors invest in this sector, hoping that by getting in early on stocks in the TMT industry, they can achieve exceptionally high returns if some of these firms eventually become big names and significantly outperform the market. Over the past decade, the sector has enjoyed unprecedented growth. In fact, as of February 2021, nine of the ten largest companies by market capitalisation are TMT companies. Incumbents such as Apple and Microsoft have been joined by a quickly scaling group of disruptive players such as Alibaba Group, Amazon, Alphabet, Netflix, and Salesforce, all of which have been buoyed by consumers' and businesses' growing appetite for technology products and services.
COVID-19 Impact on the TMT Sector
While many industries have been severely affected by the COVID-19 crisis, for the TMT sector, the economic impact has been largely neutral, or even positive for some industry segments. The pandemic has triggered a tremendous acceleration in the digital transformation of the global economy. The most severely impacted market segment of the TMT sector has been the traditional media and entertainment segment, with cinemas, theatres, and concert venues closed due to the pandemic. With the switch to digital advertising, traditional advertising have also seen a rapid decline, with players such as Google and Facebook reaping the most benefits. In contrast to the traditional media and entertainment segment, the digital media and entertainment market has seen strong growth with many consumers switching to video on-demand platforms – a direct result of the pandemic. Similarly, e-commerce platforms as well as teleconferencing and telemedicine apps have also seen a surge in usage due to the shifts in consumer behavior. The tech sector’s strong position under the pandemic has led to an increase in M&A activity, higher valuations, historic levels of venture capital (VC) funding, and numerous tech IPOs in the second half of 2020.
TMT Key Trends
Surge in M&A Deals: The pandemic reinforced the value of technology-based assets to facilitate remote working and the more general demand for innovative digital infrastructures relating to e-commerce, cybersecurity, cloud infrastructure and 5G. As a result, the TMT sector saw a surge in deal value and volume during the second half of 2020 after a pause during the first half. According to PwC's TMT M&A report, companies announced 23 TMT megadeals (with a combined value of close to $350 billion) in the second half of of the year, compared to just 9 TMT megadeals (totalling $68 billion) in the previous six months.
Mega Technology IPOs: A large number of technology IPOs took place over the past year, with companies taking advantage of high valuations to raise funds and lock in investor returns. Three of 2020’s IPOs – Airbnb, DoorDash, Snowflake –were among the ten largest US-based tech IPOs of all time. A healthy queue of technology companies are still looking to go public in 2021. This would provide ample consolidation opportunities among companies looking to expand their service offerings or solidify their positioning in the TMT market.
Focus on 5G: Remote working has resulted in the need for quick, stable, and reliable broadband services. This has increased the demand for 5G and has provided opportunities for telecommunications providers to strengthen their broadband offerings either by creating new innovative products or by offering upgrades. The demand for 5G networks could potentially spur additional M&A transactions.
Increasing Regulatory Oversight: In the US, regulatory pressure on large tech incumbents has been mounting. CEOs of big tech companies were called to testify in Congress multiple times throughout 2020. At the end of 2020, the US Federal Trade Commission and 46 states filed lawsuits alleging that Facebook is an illegal monopoly. Societal issues such as public safety and privacy are also focusing attention on the technology industry. China is also exercising regulatory oversight of public companies and those seeking IPOs. Although regulatory pressures appeared to do little to reduce deal activity during the second half of 2020, they may curb enthusiasm for cross-border M&A transactions, mega-deal activity, and further consolidation of platforms going forward.
TMT Subsectors & Key Players
Given the broad range that the TMT sector group covers, it can be helpful to divide the industry into subsectors and identify the key players in each:
Hardware: Hardware companies produce consumer and enterprise electronic goods, such as computers and networking equipment. These products are then sold domestically and internationally, either through an intermediary retailer or directly to end-users. Hardware companies include computer makers, such as IBM, Dell, and HP, as well as producers of server systems, mobile device handsets, tablets and storage devices, such as Samsung Electronics, Sony, and Panasonic.
Software: At its core, software leverages the computational power of hardware devices to perform tasks that provide value to end-users, including enterprises, governments, and individuals. The software industry is very broad, spanning from widely-used operating systems and productivity software to industry-specific programs. Microsoft, SAP, and Adobe rank amongst the top software firms.
Internet: Internet companies are some of the most well-known in the TMT sector. Alphabet and Facebook are two of TMT's highest conviction Internet holdings. Both companies generate a substantial majority of their revenues through advertising.
Media: At a high-level, media firms create, aggregate, and distribute content, such as news, television programming, movies, music, etc. The traditional media value chain begins with content creators who create and own the IP rights to the content that consumers ultimately demand. Once a piece of content is created, it can be licensed or sold through distributors. Television networks and cable TV providers, such as Comcast and ViacomCBS, are all in this subsector.
Telecommunications: The telecommunications subsector operates the system that enables devices to communicate and share information. Telecommunications is a very capital-intensive industry, which means it requires large upfront investments and ongoing maintenance expenditures. As a result, scale is the primary advantage for telecommunications providers. AT&T, Verizon, and T-Mobile are some of the market leaders that dominate this subsector.