THE DYNAMICS OF MERGERS AND ACQUISITIONS IN THE POLISH TECHNOLOGY, MEDIA, AND TELECOMMUNICATIONS (TMT) SECTOR

I. MERGERS AND ACQUISITIONS EXPLAINED TO READERS WITHOUT A BACKGROUND IN FINANCE

According to the theory of enterprise value management, or Value Based Management, the overarching goal of business operations is to maximize their value for stakeholders. In order to achieve long-term success, growth is necessary - realized through either an external or internal growth strategy. A particularly interesting form of external growth is mergers and acquisitions - M&A.

Mergers can be defined as the combination of two or more independent entities into one. This is done to share resources or achieve common goals, and it is not uncommon for shareholders of companies to remain co-owners of the merged entity. In an acquisition, one of the companies takes control of the other's operations and assets. M&As are solutions that represent an opportunity to, among other things, improve a company's profitability through synergies or expand its business reach.

M&As can serve as a means of reducing a company's vulnerability to the business cycle or respond to a particular phase of the cycle. Nevertheless, the dynamics of M&A is related to the business cycle - this is the repeated fluctuation of economic activity manifested in deviations from the trend, absolute changes or fluctuations in the dynamics of economic variables (Burns & Mitchell, 1946) - a definition known as the classical business cycle. It can be used with measures such as GDP dynamics, inflation levels, population income or unemployment rates.

In this view, we can distinguish four phases: recovery, expansion, recession and depression. The first is encountered when there are fluctuations in the size of real GDP and its growth rate for two quarters, which contributes to a decline in demand for credit and investment activity or labor. After the economic slowdown comes a recovery and expansion phase, which is characterized by an increase in the rates of demand, investment, consumption, production and employment. And after the rapid growth phase comes another slowdown, so that the cycle can repeat itself again. Each cycle runs differently, influenced by their different background or characteristics and scale. This is why correct identification of the business cycle and skilful anticipation of its changes by management is necessary to make the right decision on M&A at the right time.

Technology companies offer high growth potential - as globalization continues, every sector in the market is influenced by the latest technology, automation or robotization. The technology industry continues to grow, playing a significant role in customer services, service delivery and supply chains. This is why more and more companies are choosing to partner with TMT companies (TMT: Technology, Media & Entertainment, and Telecommunications), rather than developing software or a system from scratch using their own resources. Deals are being made to achieve economies of scale and expand the scope of a company's operations and acquire new business opportunities beyond its original type of business.

II. M&A DEALS IN THE POLISH TMT INDUSTRY: 2016 - 2022

A feature of the M&A market is that it is a reflection of the market situation, it indicates trends in the economy. Analyzing the economic situation in 2016-2022, two main phenomena can be separated, i.e. development and slowdown tending towards recession. After reaching a high economic level in 2017-2019, a period of slowdown began, which was accelerated by the shock of the coronavirus pandemic in 2020. Over the years analyzed, there is an upward trend in the percentage of acquired TMT companies in the M&A market, and apparently this is reflected in the data from 2019. - 22% of total transactions are TMT industry (in subsequent years 22%, 26%, 28%). Among buyers, the number of TMT companies is also increasing, while PE/VC funds were less interested in acquisitions.

Despite the acceleration of economic growth in 2016, the Polish M&A market was characterized by lower activity, the reason for which was, among other things, the change in the Polish political scene, which created great uncertainty among investors. A downward trend was also observed in terms of the value of transactions concluded. The rating was downgraded, which caused anxiety and negatively affected the bond market, and the political situation reduced the value of the Polish zloty. On the buying side, financial institutions and PE/VC funds dominated, while private investors were among the sellers. In contrast, consolidation increased in the area of cloud computing.??????

In the following year, the M&A market saw 9% more mergers and acquisitions than in the previous year. This was due to lower interest rates and lower economic uncertainty. The WIG exchange rate remained high, and the zloty strengthened against the US dollar and the euro. An example from the TMT sector was Cyfrowy Polsat, which placed an order to acquire a 32% stake in Netia, listed on the WSE, valued at PLN 770 million. The decision was based on the attractiveness of the acquisition due to its customer base, entry into a completely new market, and thus the possibility of developing another service for current and future customers.

Despite the noticeable economic recovery, there was a decline in foreign acquisitions in terms of deal value in the following year. In 2018, deals of small and medium so-called Mid-Caps (value 100-400 million PLN) dominated, and the trend of interest in consolidation in the TMT industry was stable. Investments were supported by low interest rates, and economic uncertainty among entrepreneurs regarding, among other things, a growing shortage of qualified personnel, a weak zloty, or a reduced stream of foreign investments decreased. Decisions made by TMT company managers, at a time when the recovery was still visible transitioning to a slowdown in 2019, were particularly concerned with the need to intensify competition, increase market reach (Cyfrowy Polsat's acquisition of Netia), or have strong market exposure (Nets' acquisition of DotPay).

As of 2019, the number of transactions in the TMT industry in the Polish M&A market only grew, while their dynamics were lower than in the previous year, in response to the global economic slowdown. Nevertheless, the M&A market of the TMT industry in Poland was constantly prospective, as evidenced by the increasing influence of domestic players in the European market, the absorptive capacity of the Polish market, or the high transaction capital available to an increasing number of Polish entrepreneurs. There was a noticeable consolidation trend in the TMT industry, where the acquirers were large players who cared about revenue synergies, and acquiring companies with low marginal cost of products hoped to increase profitability through their acquisitions. An example of such a transaction was Glovoapp23's purchase of Pizza Portal, an online food ordering portal and app. The value of this transaction was PLN 129 million. Managers' decisions to invest in the M&A market during this period of slowdown, concerned increasing expansion in the region (e.g., H88's purchase of Croatian hosting provider Avalon), or the desire to unify services in the European market (Media Press Group's acquisition of Plurimedia).

The year 2020 in the financial markets was very volatile, as many indexes, including the WIG20, recorded their weakest session at the time and the next part of the year was spent making up for losses. For some sectors, particularly technology companies, the process was rapid. In Poland, inflationary pressures were evident due to, among other things, increases in minimum wages, which translated into an above-average increase in wage levels throughout the economy. In addition, there was a decline in GDP, an increase in inflation, and a reduction in interest rates. However, this state of the economy and the pandemic did not limit the number of M&A transactions in the TMT industry in Poland, due to the development of the trend of digitization, investment in IT solutions, financial services (e-commerce and big data), or solutions for more convenient online payments and investing in stock market shares. Demand for companies offering IT and media services increased from 20% in 2019 to 22%. The share of the TMT sector on the buyers' side remained at 19% compared to last year. There was noticeable interest in the Polish market, foreign entities interested in acquiring modern product solutions, e.g. identity management services (Lorentz Tech Ltd bought 100% of Cube ID), or entering a new market and service segment (acquisition of Play Communications by French network Iliad Purple S.A.S. for more than PLN 9.6 billion).

2021 was marked by an increase of ? of the number of completed M&As in the TMT industry, compared to 2020, as a result of the initially sustained strong M&A market. However, over time, signs of an economic slowdown were evident. Rising inflation, with the Central Bank keeping interest rates low, encouraged investment, taking advantage of low financing costs. Some players took advantage of these circumstances to carry out horizontal or vertical integration, seeking to optimize rising costs. Despite the weakening economy, the TMT industry has strengthened in the M&A market and has seen, in addition to consolidation, cross-sector, co-investment deals with private equity funds. This trend has led company managers to note that digital adoption has great scalability and is one of the best ways to optimize corporate processes. What's more, the M&A process protects companies from the exodus of IT specialists. One of the most interesting transactions of the TMT industry was the acquisition of Rortos by mobile game developer Ten Square Games, worth about PLN 203 million, which represented a valuable asset for the manufacturer and also an opportunity for growth due to the flight simulator segment it operates and the experience of its employees. Due to the manufacturer's presence on the WSE, the price paid for the business it was interested in, the so-called "Enterprise Value," was a reflection of EBITDA and the multiplier (9.8) that formed on the market during the close of the transaction.

In 2022, an economic slowdown was visible, characterized by higher interest rates on loans, which discouraged economic activity, and rising inflation, which meant higher costs for businesses. Nonetheless, the number of M&A deals continued to grow, and further forecasts indicate increasing interest in TMT growth industries due to their resilience to crises - an increase in demand for digital or cloud services. An example of an interesting transaction is Cordiant Digital Infrastructure's acquisition of Emitel, a TV signal company. The acquisition was decided on the basis of the attractiveness of development in telecommunications infrastructure and smart city. In the wake of the war in Ukraine, in addition to standard due diligence, investors are looking at supply chains.

III. THE LOGIC OF M&A TRANSACTIONS IN THE TMT INDUSTRY

The consolidation of TMT companies is developmental in nature. It has a positive impact on the recovery of the M&A market, as it is an attempt by companies to seek growth opportunities. In the technology industry, M&A is a response by companies to expected changes in the market and new trends, which, in the opinion of entrepreneurs, will determine future revenues, and is a way to acquire new competencies or strengthen existing resources. Consolidation sometimes becomes the only chance to save the company in a period of economic downturn, but above all it allows for more effective expansion, if only through the possibility of creating a more attractive offer. Managements of acquiring companies are keen to optimize operations, achieve revenue synergies, or acquire developing product solutions. During the economic downturn, M&A activity in the TMT industry was the result of decisions by company managers to increase market exposure by intensifying competition or increasing synergies, and profitability. At a time of economic growth, M&A market activity was determined by the desire to bring cutting-edge product solutions, expand into a new segment, or acquire know-how.

When focusing on the process of examining a company, so-called due diligence, it is advisable to take into account salary costs and their market values. Low salary risks are found in IT or media companies, and the lowest among telecommunications companies (the salary-to-cost ratio is about 10%). On the other hand, however, these companies are exposed to rising energy costs.

In the process of mergers and acquisitions, it is fundamental to firmly frame the purpose of such an investment. In the cited examples of TMT companies, the main considerations were the attractiveness of growth, increasing shares in a particular market or revenue synergies. The industry is encouraging investment even during an economic downturn. However, with rising inflation, wage pressures and predictions that the Polish zloty will weaken against the dollar and euro, there will be more interest in companies with a subscription model, such as SaaS, whose revenues are generated in euros or dollars.