Article

Valuing technology, media and telecom entities in M&A

10 essential steps to maximize transaction value

January 21, 2025

Key takeaways

TMT sectors rely on digital advancements and innovation in M&A.

Accurate revenue recognition is crucial for capturing true revenue performance. 

Retention trends reveal recurring revenue strength and growth potential.

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Private equity
Business acquisition Technology industry Financial due diligence Transaction advisory

This article was originally published on July 18, 2020, and has been updated.

In the fast-evolving technology, media and telecommunications (TMT) industry, financial due diligence goes beyond the traditional “quality of earnings” analysis to assess recurring earnings. Investors need a deeper analysis to uncover the value drivers and potential risks within this competitive, dynamic industry. A focused evaluation can offer a clearer view of a company’s true potential—an especially crucial perspective in today’s unpredictable economic environment.

Here are 10 critical steps to help investors gain a comprehensive understanding of the value drivers in TMT businesses, identifying both opportunities and risks in potential transactions.

Revenue analyses: Optimizing financial performance

  • Revenue recognition: Beyond cash flow, earnings should be reviewed to accurately capture revenue performance, critical in transactions where revenue patterns may affect valuation.
  • Customer retention: Understanding retention trends offers insight into recurring revenue strength, growth potential and customer loyalty. Metrics include annual recurring revenue, total contract value and customer/user count, which serve as indicators of a company’s stability in subscription-based models.
  • Contracted backlog and estimated pipeline: Reviewing contracted backlog and pipeline data helps forecast future revenue, especially when combined with retention metrics, for more precise financial modelling.
  • Customer concentration: Analyzing the diversity of revenue sources highlights risks from high dependency on major customers, while also identifying opportunities for targeted upsells and customer diversification.
  • Lifetime value: Estimating customer lifetime value based on historical revenue patterns helps gauge potential revenue from customer relationships, offering guidance for strategic decisions of growth-focused TMT firms.

Cost analyses: Enhancing profitability and efficiency

  • Gross profit analyses: Gross profit—revenue minus cost of services—must be accurately calculated to reflect profitability. Correct cost allocations are essential for a transparent view of gross margins.
  • Utilization rates: Analyzing employee utilization rates—time spent on billable versus available hours—helps assess efficiency and management of personnel costs, which directly affects profitability.
  • Customer acquisition costs (CAC): By analyzing CAC, investors gain a clearer picture of pricing strategies and scalability. Earnings per customer should ideally exceed CAC to ensure long-term growth.
  • Software development costs: TMT companies must distinguish between expenses and capitalized costs for software development, which affect asset valuation and financial reporting, especially in firms with software as a service (SaaS) or on-premises offerings.
  • SaaS rule of 40: The “rule of 40,” calculated by adding the revenue growth rate to the EBITDA (earnings before interest, taxes, depreciation and amortization) percentage, is a benchmark for SaaS businesses. Companies hitting or exceeding 40 per cent demonstrate a robust balance between growth and profitability.

Enhancing strategic value

To further optimize transaction value, TMT investors should also consider:

  • Adaptability and agility: Understanding a company’s adaptability to new technologies and shifting market demands will help mitigate risks and enhances competitive advantage in dynamic TMT landscapes.
  • Strategic acquisitions: Pursuing acquisitions that align with long-term growth objectives—such as entering emerging tech markets or strengthening data capabilities—can drive scale, operational efficiency and sustained market relevance.
  • Data-driven decision making: Leveraging advanced analytics to assess customer behavior, refine operational efficiencies and make informed investment decisions can improve both valuation and long-term resilience.

The takeaway

These analyses lay a solid foundation, but investors should also assess a company’s cash flow management and financial resilience to fully understand the return on investment in TMT transactions. By implementing these 10 steps, and gaining industry-specific insights, investors can gain a well-rounded perspective to navigate the complexities of the TMT sector and make more informed, value-focused decisions.

RSM contributors

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