M&A is boosting digital transformation

M&A is boosting digital transformation

Contents 1

Towards a digital future

2

Digital transformation across the value chain

3

The lifestyle services boom

4

RDC’s M&A strategy matrix

5

Top tips

The TMT industry is at an inflection point With traditional communications revenues stagnating as we trend towards customer saturation, innovators are scrambling for the next big disruptor to meet consumer hunger for new life changing technologies.

This has spurred on a frenzy in M&A, both niche and large scale.

Valuations have been pumped up by the hype around new tech and diminishing access to greenfield opportunities and untapped markets.

But what exactly has been driving the goodwill commanded by TMT pioneers? Traditional economics tells us that price is set where supply meets demand. Experience, however, has shown us that demand is not only created through rational economic thinking, but by softer factors, underpinned by a more personal agenda of entrepreneurs. We take this into account in this paper, and offer some best practices to optimise your growth agenda through M&A.

We explain how significant M&A activity is being fuelled by digital transformation, and in turn, M&A is accelerating this transformation at lightning speed.

To help us make the right choices in our M&A strategy, we explore two dimensions driving decisions. On the one hand the need for SCALE (new markets, more volume) and on the other SCOPE (new technology, more value).

Choosing the right direction of travel between scale and scope, and deriving the optimal value out of a transaction requires a well thought out M&A strategy. We look forward to hearing about your growth agenda!

May 2022

1

Towards a digital future M&A value breaches $1.5Tn In 2021, TMT M&A breached the $1.5tn 1 dollar mark. The USA accounted for a over third of this figure, with Europe, the Middle East and Asia combined contributing a similar amount.

Going forward, acquirers and In the near term, we expects this surge in TMT sellers need to balance the M&A activity to continue globally. Regionally, M&A need for digital transformation strategy is deeply impacted by macro geo-political with a rise in economic and socio- economic factors one the one hand and uncertainty industry level drivers on the other.

The key to successful M&A is to understand the more predictable industry level drivers and to adopt sustainable principles to mitigate risks with more uncertain macro shifts.

The Covid pandemic, Ukraine war and rising cost of capital have compounded uncertainty in recent times.

At an industry level, we call out some drivers of M&A which we include under the umbrella of digital transformation.

Digital transformation at speed So, why are we seeing M&A gain such momentum in favour of businesses developing in-house capabilities? The answer lies in the need for sheer speed to gain advantage in a fiercely and exponentially evolving digital market.

In Figure 1, we identify 3 waves of transformation. With foundational core digital communications, market maturity has taken almost 30 years. With the second wave of digital lifestyle services, the development and adoption cycle is much quicker. Going forward, we’re seeing signs of an emerging generation of immersive technologies moving further into the realms of virtual reality, artificial intelligence, biometrics and machine connectivity. In response to stagnant revenues and plateaued subscriber growth in traditional communications markets, rapidly developing immersive lifestyle services has become an unavoidable strategic imperative.

Successful digital transformation enables service providers to compete with OTTs, tech startups and emerging industry disruptors

Notes: 1RDC Market Sizing , KPMG- M&A trends in TMT: TMT Leads in a hot M&A market 2021 | cityam.com. 2021: An exceptional year for EMEA M&A

© 2022 confidential

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1

Towards a digital future M&A is accelerating digital transformation in TMT Figure 1: Waves of digital transformation

Metaverse, HealthTech, FinTech and more

Market Maturity

5G launches and IoT explosion

Increasing value

Over the top players emerge (Netflix, WhatsApp etc)

Digital networks launch

Global mobile penetration Enter MVNOs >50% and smartphones

Digital lifestyle services

The next generation of innovations

Time 1990

2000

2010

2020

The traditional mobile market has reached peak maturity, soon entering a phase of decline and we are already seeing the beginnings of the next wave of digital evolution. Whether it is in the virtual ‘meta’ world, a hyperconnected environment or with new ways of collaborating, it will happen at rocket speed. No doubt, somewhere in MIT a tech genius is writing a ground breaking dissertation, in the R&D labs of Google an engineer is crafting the next game changing invention.

© 2022 confidential

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2

Digital transformation across the value chain M&A is fuelling digital transformation Digital transformation is a widely-used phrase, with varied applications between a spectrum of industries. To give us focus, at its core digital transformation uses digital tools and processes to automate product development, ways of working, customer relations, and increasingly, culture.

From digitisation of customer records to virtual working to highly complex artificial intelligence, digital The quest for digital transformation is hugely expansive.

These transformation is an transformations are likely to be with us for the essential part of value foreseeable future and we have identified a number creation and corporate of hot topics where M&A has been gaining sustainability momentum.

To explain this, we have broken the TMT industry onto 3 areas that represent a simplified value chain: infrastructure, platforms and services. We’ve adopted this framework to reflect the overall market trend of splitting network infrastructure and service delivery (referred to as the NetCo/ServCo split).

Figure 2: The NetCo/ServCo split supported by platforms

Infrastructure

Platform

Services

(NetCo)

(Enabler)

(ServCo)

Fixed and wireless capacity for high bandwidth applications, super fast connectivity

Orchestration of flexible business support systems.

Converging communications and media operations

Innovations in lifestyle services, e-commerce and collaborative working

Even within major operators this fragmentation is becoming more prominent, leading to wholesale models that allow virtual operators and service providers to buy capacity from carriers and focus on brand and customer relations.

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Digital transformation across the value chain What is driving digital transformation?

Infrastructure

Today’s landscape

• Transit rates are falling

Major transformation examples

2

• Huge capacity demands and hyper-scaling • Split between NetCo and ServCo • Cloud is taking centre stage • High CAPEX fuelling network sharing

Platform

Services

• Digital brands are catering to more niche segments

• Airtime margins are being squeezed

• Integration between networks (for connectivity) and service providers (e.g.

MVNOs)

• Over the top players are disintermediating operators

• Operational challenges (e.g. billing) with managing multi-service portfolios

• Handful of tech giants (Amazon, Meta, Google, Netflix, Apple) dominate customer engagement

• Bandwidth increasing with fibre and 5G rollouts

• Embedding artificial intelligence into customer experiences

• Connected devices are proliferating

• Consolidation and core network sharing

• Platform as-a-service (PaaS) models

• Customer experience management

• Network virtualisation and automation

• Rich data analytics and personalised services

• Frictionless e-commerce solutions

• Cyber security deployments

• Multi-tenancy platforms

• IoT enablement

• Open APIs to facilitate third party integration

• Adopting new digital lifestyle services for immersive experiences (e.g. VR, HealthTech, FinTech)

• Convergence of cellular, satellite and Wi-Fi connectivity • Edge-computing and cloud models • Network-as-a-service models

• Developing AI to improve retention and automate processes • Wholesale platform architecture for digital brands

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• On demand media streaming and content bundling

• Digital security enhancements

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Digital transformation across the value chain

2

Large (scale)

Examples of M&A for digital transformation Infrastructure

Platform

Services

Virgin/O2 UK merger (2021) to reduce capex costs and increase customer base

Cisco acquired IMI mobile (2021) to integrate into its Webex Contact Centre to create an experience-as-a-service offering

A&T acquired TimeWarner (2018) demonstrating push for growth, leading to HBO Max’s launch to compete with streaming services

Microsoft acquired Activision Blizzard (2021) solidifying its position as a market leader in gaming

JP Morgan acquires Nutmeg (2021) to grow a socially conscious customer base, an instance of nontech acquiring tech

Alphabet acquired MobiledgeX (2022) to strengthen its edge computing

Altice France consolidates with MVNO Coriolis (2022), adding 500,000 customers and 30,000 businesses

Amdocs acquired DevOpsGroup (2021) for new market channels and Sourced Group (2021) & Openet (2020) to improve cloudnative offerings

M-Pesa acquired by Safaricom and Vodacom (2020), to target the unbanked in regions throughout Africa, focusing on security and convenience

Wireless Logic acquired Com4 (2021), strengthening Nordic market channels and adding mobile capabilities

Orange Bank acquired AnyTime (2021) to move into small business services

Indosat Ooredoo and 3 Indonesia’s (2022) merge, creating enhance networks and aid 5G rollout

Taiwan Mobile and T Star merge (2022) to enhance each others 5G capabilities

Small (scope)

Three Scandinavia sells tower infrastructure to Cellnex (2020)

Cordiant Digital acquires Polish operator Emitel (2022), gaining mobile towers, national fibre networks, and digital terrestrial network infrastructure

Lumine group acquired six companies in 2021 to grow vertically focused software portfolio

© 2022 confidential

ByteDance acquired Moonton (2021) expanding from video sharing (TikTok) into video game development

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3

The lifestyle services boom

Super brands are forged by deep customer engagement Digital brands are turning their attention towards advanced value added services to combat ever declining airtime margins and increasing competition. Winners in the customer engagement race are those offering a range of compelling lifestyle services to become super-brands engrained in everyday life.

We’ve seen major brands fundamentally diversify portfolios through acquisitions, for example:

Media

MVNO Telenet acquired SFR Belgium (2017). This deal geographically expanded Telenet’s presence as well as securing their multi-play offerings in fixed-line, pay-tv and broadband

Retail

Tesco bought out The Royal Bank of Scotland from their joint venture Tesco Bank (2008), this consolidated their position as a full quad-player (fixed-line, cellular, banking, broadband)

Online

Amazon acquired MGM (2021) and Twitch Interactive (2014) to consolidate its position in the video streaming market

Is it inevitable for on-line retail and media superbrands, like Amazon, to offer fixed-line and mobile communications, completing the lifestyle services playbook via M&A?

Let’s look at what is happening within some lifestyle service areas: IoT, content, HealthTech, Fintech.

Customer insight through rich data analytics, robust connectivity and seamless user experience underpin the success of these opportunities. The MVNO space, spawned from the NetCo/ServCo fragmentation, is also one to watch as the focus on segment specific lifestyle becomes more important.

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3

The lifestyle services boom

Internet of Things (IoT) IoT is fast becoming embedded into everyday life, both commercial and industrial, with global IoT connections projected to grow from 14.6 billion in 2021 to 24 billion in 2050.2 Given the range of IoT applications, specialised platforms are needed to provide security in surveillance, resilience in HealthTech, flexible billing in retail, and more.

Hot companies to consider for acquisition revolve around connectivity, smart tech and security, for example: • Smart tech which integrates multiple connectivity types including cellular, Wi-Fi, satellite, low power, and Bluetooth for always on coverage • Security technologies which address safety concerns given the sheer scale of unregulated connected devices • Healthcare tools which embed trackers and AI diagnostics into wearables Looking forward: how important will smart technologies connecting headsets to sensors to services be in the hugely disruptive Metaverse?

Service providers see IoT enablement as a growth opportunity. Here are some examples:

Telefonica invests in Israeli cloud based network Monogoto for 5G, IoT and edge computing services (June 2021)

NTT Communications acquired majority of stake in Transatel gaining data MVNO solutions to extend Global positioning in IoT.

Tata communications acquired MVNE Teleena with the goal of improving cross-border IoT management (Oct 2018)

(Mar 2018)

Notes: 2Ericsson.com. 2022. Mobility Report November 2021 and Why IoT changes everything

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3

The lifestyle services boom

Growing IoT opportunities 5G opens up a plethora of IoT opportunities particularly in high bandwidth applications including drones, connected vehicles, and content streaming. Satellite connected IoT M&A is beginning to gain momentum as logistics, critical and remote access use cases develop. For example:

Vodafone acquired AST SpaceMobile in April 2021 with the aim of improving cross-boarder connectivity offerings

PE firm Horizon acquired and merged Ground Control, Wireless innovation, and Rock Seven under the brand Ground Control to create an integrated satellite IoT solution provider

However, the market is still in its infancy. Companies will try before they buy, creating partnerships that indicate what’s to come, for example.

Lynk’s and Unitel agreed in 2021 to partner on satellite-to-cell service in Mongolia

Yahsat partnered with Ericsson in 2021 to provide private networks for remote critical communication industries in MENA and Central Asia

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3

The lifestyle services boom

Content With more disruptors in the form of OTTs, video-on–demand platforms and free sources of entertainment available than ever before (including YouTube, TikTok), service providers need to be more content focused.

Partnerships have been formed between operators and OTT content providers, offering direct carrier billing and new distribution channels.

In 2018, AT&T completed their acquisition of TimeWarner, enabling the creation of HBO Max to compete with other OTT content services

Telefonica and Netflix have partnered to enhance the latter into Telefonica’s pay-TV services across LatAm and Europe through a single bill

Massive acquisitions of content creators enable operators to take full advantage of OTT and video on demand services.

HealthTech Digital transformation is revolutionising healthcare by creating tools such as informatics, AI and diagnostic technologies. Operators, by their nature have access to a wealth of customer information as well as possessing invaluable infrastructure assets needed to maintain secure systems, devices, and data.

Overlapping with the FinTech world, health informatics are vital for risk assessment in InsurTech

Mobile operators have credibility to build out health-related services. We are seeing some emerging movements by mobile operators is this space:

Orange invested in DabaDoc late 2021, positioning itself in MENA and SSA as a facilitator of e-health and enabling expansion of DabaDoc into more regions, providing technological expertise and payment solutions

Verizon acquired video conferencing platform Blue Jeans in 2020 and has subsequently expanded the platform out into the telehealth sphere (offering conferencing, information sharing, and data security)

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3

The lifestyle services boom

Fintech Fintech is the future of banking. Operators have an opportunity to expand on their use of direct carrier billing and security features to keep up with the lightning fast development of the FinTech industry. M&A can accelerate capabilities in fraud management, credit, loyalty, remittances, and security. There is a growing opportunity to access the unbanked market, for example through e-wallet solutions and bespoke credit facilities. Some have already taken steps to strengthen their foothold in the sector with Orange Bank, a mobile banking subsidiary of Orange Telecom, acquiring SME neobank AnyTime in early 2021.

Pure FinTech M&A is currently exploding across a spectrum of sub-sectors with a spate of acquisitions taking place in 2021 for example: Figure 3: M&A across FinTech services

Buy now pay later

Neobank Zilch acquired lending platform NepFin

Payments

Incumbent VISA acquired Currency Cloud

Digital Banking

DeFi

Neobank Starling Bank acquired Fleet Mortgages

InsurTech

Lending

SaaS

Incumbent CryptoDigital Credit Mastercard exchange financial reporter acquired Gemini services firm Experian Ekata, acquired Ally acquired acquired specialising crypto credit credit card insurance in anti-fraud card firm company broker Gabi ID blockrize Ollo verification

Undisclosed $925 million ~$69 million Undisclosed $330 million $750 million $850 million

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3

The lifestyle services boom

Mobile operators acquiring MVNOs Since 1999, operators have opened access to non-telco virtual brands (MVNOs) on a wholesale basis to access niche segments and avoid brand dilution. This is an area where M&A is not a new concept: as early as 2015 we saw KPN take ownership of discount MVNO Telfort. Why now have we seen a sudden explosion of MVNO acquisitions by incumbent operator? M&A is a tried and tested means of enhancing a companies competitiveness in a time of fierce competition.

MVNO acquisitions have gained momentum as they have matured their infrastructure to offer service flexibility appealing to specific segments.

Some operators have thrown themselves into this business model making fast acquisition of a range of MVNOs to offer greater breadth in additional service offerings, like Spanish operator Grupo MasMovil, as shown in the table below.

The table also highlights a number of acquisitions aimed at helping operators gain access to niche segments.

Figure 4: Example of MVNO M&A deals

Operator (acquirer)

MVNO (Target) Fello (2019)

Target Market Discount market access without expense of brand building

Keyyo (2019)

Small medium enterprise market share consolidation via improved service innovation

TracFone (2021)

Parent of multiple MVNOs, 21 million subscribers across retail and discount markets

Amaysim (2021)

1.2 million subscribers across the discount with no need for brand building or dilution

Lebara Mobile Spain – 2018

Consolidates position in the ethnic segment via prestigious brand

Lycamobile Spain – 2020 Ocean’s - 2020

Further market consolidation in the ethnic segment Discount market access

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4

RDC’s M&A strategy matrix

M&A decisions revolve around scale and scope Having explored the major market shifts and looking ahead to the near term M&A opportunities, we propose a set of strategies depending on where a company or investor is on its growth journey.

RDC M&A MATRIX

DEEP TECH/ WIDE MARKET

• Merge or acquire horizontal business solutions

• Improve margins by divesting non-core assets

• Divest peripheral and non-core serving assets

• Acquire and incubate new tech start-ups

• Acquire new channels to market

• Acquire high growth emerging verticals

• Partner with integrators and OEMs

• Acquire ‘as a service’ platform providers

SCOPE

High

DEEP TECH/ NICHE MARKET

NICHE TECH/ NICHE MARKET • Partner/merge with larger companies that need niche capabilities

• Acquire vertical focussed companies • Identify companies with adjacent technologies for M&A or partnerships

• Acquire small business with specific technologies Low

NICHE TECH/ WIDE MARKET

• Fund raise based on differentiated innovation Low

SCALE

High

Figure 5: RDC M&A Matrix

Most likely direction of travel © 2022 confidential

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RDC’s M&A strategy matrix

4

M&A decisions revolve around scale and scope

Illustration for the car industry

DEEP TECH/ NICHE MARKET

DEEP TECH/ WIDE MARKET

NICHE TECH/ NICHE MARKET

NICHE TECH/ WIDE MARKET

Low

SCOPE

High

RDC M&A Matrix

Low

SCALE

High

SCOPE

Orange invests in DabaDoc (2021) to access the MENA e-health market, extending scope

Wireless logic acquired 7 companies between 20192021, a strategy to reach large scope and scale

The 2021 Virgin/O2 merger in the UK expanded the scale of both companies

Low

A well executed M&A strategy understands the building blocks of a comprehensive lifestyle services experience

High

RDC M&A Matrix (examples)

Low

© 2022 confidential

SCALE

High

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5

Best practices

Are you all set for your M&A journey?

Here are some considerations to help with your M&A strategy…

1. Don’t get too clouded by emotion Building tech businesses is an exciting game. But many tech visionaries have agendas shaped by personal experiences which can unduly influence the goodwill paid in a deal. Traditional valuation methods are sensitive to a handful of drivers such as NPV discount rates and EBITDA multiples, but there is subjectivity in these. They can easily be fudged to give a desired outcome. Using a mix of top down and bottom-up forecasts based on solid benchmarks will help derive a fair valuation.

2. Do the right level of due diligence Qualifying investments early with the right sector experts can save a lot of unnecessary resource on an extensive due diligence process. A ‘red flag’ review with inputs from a specialist is a great way to highlight early warning signs and opportunities. A go/no go decision can be made before an expensive deeper drill analysis is required. Often a validation is required from a large ‘big 4’ type advisory firm, but this should not be at the expense of hands on, deep sector understanding.

3. Don’t always believe the hype There are many buzz topics floating around including IoT, AI, edge, virtual reality, blockchain and yet to be proven models in the ‘meta’ sphere. With technology innovating at phenomenal speed, the risk is that they have not been proven yet or have short lifecycles which risk being quickly replaced by disruptors. Investors time horizons for quick returns seem to be shortening but care needs to be taken to avoid being caught by a ‘bursting bubble’.

© 2022 confidential

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5

Top tips

…Considerations continued 4. It’s not all about the numbers Aside from necessary rigorous financial analysis, softer factors can make or break post M&A success. Identifying qualitative intangibles such as customer relationships, loyalty of teams and development skills will help extract more value out of a deal than looking only at spreadsheets. When integrating teams, culture clashes often hinder progress, and founders who are not incentivised properly may not remain. Unpacking key stakeholder’s motivations and retaining skills requires a level of HR expertise not often factored into technology led M&A deals.

5. Is M&A the only route to rapid scale?

Whilst M&A is hot right now, other options are worth considering to improve scale or scope. Partnership models could be a great way to test a relationship, for example with a systems integrator as a distribution channel. A limited investment stake, potentially with a controlling interest could be a steppingstone tactic to limit risk and avoids a rapid change shocking the fabric of a business.

6. A solid growth plan is a key asset To mitigate the risk of an acquisition, it is important to test the organic growth initiatives of a target company’s stakeholders. To avoid “indigestion” into a parent acquirer, the growth initiatives should rely on post merger specialist to realise synergies and integrate teams smoothly.

Whatever your M&A strategy, happy hunting!

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Leading M&A strategies for consolidation and growth The content in this publication has been prepared for general information purposes only. We do not accept liability for any loss resulting from actions taken based on any material in this publication.

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Red Dawn Consulting has provided rigorous market analysis and winning strategies to deliver growth for +100 companies in the Telecom, Media and Technology industry. Our strategies are grounded with an intimate understanding of competition, customers and emerging innovations from around the world.

Talk to us about building a winning M&A strategy Arun Dehiri

arun@reddawnconsulting.com

Managing Director

+44 7970 653134

Adriana Portela

adriana@reddawnconsulting.com

Senior Consultant Cristina Liberal Senior Consultant

cristina@reddawnconsulting.com

Level 1, Devonshire House, One Mayfair Place, London, London W1J 8AJ United Kingdom

+44 (0) 333 301 3450 www.reddawnconsulting.com