In the first half of 2007, the global Technology, Media and Telecom (TMT) sector witnessed 399 Merger and Acquisition (M & A) transactions with a total value of US $76 billion. The sum of all TMT transactions in 2006 was just over $60 billion.
In the meantime, Private Equity bidding wars have been filling business pages all over the world. The deals they are involved in are growing larger and their targets increasingly high profile, with media companies proving more popular. Some view them as asset stripping vultures; others praise their ruthless but efficient management practices.
However, little of this intense activity has occurred in the Middle East so far, says Peter Einstein. The former CEO of Showtime Arabia and his new business partner, Brian Pohl intend to change that with their new company, Einstein Media Capital Partners (EMCP). The firm will offer consultancy on both private equity and M & A deals as well as making its own investments in the TMT sector.
Despite the lack of action in the region, Einstein does not believe there is a lack of interest in such deals.
"Investors find TMT seductive and they want to get involved in the sector but what they don't understand is ‘if I put my money in, how do I get it out?'" explains Einstein. "People understand bricks-and-mortar and things you can touch and feel but TMT is much more ‘soft'. You need to understand these businesses in order to see their true worth. There's plenty of value in these companies that develop media properties or technologies."
Einstein's partner, Pohl, who is a former venture capitalist and fund manager, agrees: "There are people here who have capital to invest, but don't understand what this ‘soft' media stuff is. For us, it's about helping them understand the framework that fits around these investments. With real estate, you don't put a building into your wallet. You take a stream of cash from rental income or by selling off the apartments inside. It's the same thing with the media: take a TV programme, the aim is to turn that from nothing but some ones and zeroes on a disc into a stream of cash by selling the content, through advert space or by creating a new TV channel. This is about educating the market."
But will media savvy investors from more mature markets in the West bring their funds to the Middle East? Einstein believes they will.
"There's a lot of capital here available for investment; we don't need to go to the US or to Europe to bring money in." says Einstein. "Having said that, we have talked to companies from these other territories that have money to invest over here. They like the sector and the region, but they say ‘we understand media, but we don't understand media in the Middle East'."
Over the past ten years, the broadcast industry has experienced rapid growth throughout the region. There is a distinct difference between growth and development, however, and progress, from a business point of view, may not involve the creation of even more channels.
"The market place right now is not too deep. This part of the world has 400 TV channels and the resources are spread so thin that lots of them are not really satisfying consumers," claims Pohl. "Many are vanity creations; ‘I'm gonna create this station because this is what I want to watch'. In the meantime, that ad space could be supporting someone who has a really creative product.
"Realistically, I would say the market can support 100 of those channels. If you took all those resources and picked one station of every four, think what they could do with quadruple the ad revenue? And this comes back to, how these deals could benefit the companies," Pohl continues.
"Suddenly you have profits to invest into that new piece of editing software that allows you to make a programme faster. Then you can get more programmes out there and get more commissions and diversify into different areas. Maybe with a big chunk of capital - instead of growing organically - you can buy another company and expand even faster," Pohl adds.
Einstein seconds that. He believes that many of these "vanity channels", which are not always driven entirely by economic incentives will begin to wane as the owners lose interest. Consolidation of the TV market is something he is convinced we will see as the industry matures though the result of this consolidation remains unpredictable as the composition of owners and their principles change.
"Private Equity will ensure businesses are run properly with good management. These management changes are bound to have knock-on effects," says Einstein.
Pohl adds that as commercial considerations start to move up the ladder and surpass political or vanity motivations, decisions will be based on different criteria. "The outcome of those decisions will be different," he claims.
Convergence is also likely to play a big role across the TMT sector as, for example, the demarcations between mobile communications and television begin to blur. With the addition of the internet to the media melting pot, the industry is certainly capable of solidifying into several possible forms.
EMPC's first investment typifies this situation.
The company has bought a stake in a new gaming channel, called GINX, which will be launched in Europe before making its Middle East appearance.
"Video gamers are now not just kids. They are commonly 30, 40 and now with the introduction of Nintendo's Wii, everybody seems to be getting involved, even people well outside of the demographic," explains Einstein. (Pohl admits that his parents have bought themselves a Wii before him.)
The new channel will use actual gameplay as the basis for its programming, which will be edited into themed content, keeping production costs down.
"It's entertaining, it's informative and it's creative. We're targeting the casual rather than the heavy gamer as well as challenging the non-gamer to become interested. The programming leads you to the website so that you can actually go on and play what you've just seen. And this is where we have huge revenue opportunities," claims Einstein.
"The website will have different games with different sponsors, and people will be able to download and pay for a game on our site. So GINX the TV channel will actually act as a marketing tool for the website rather than the other way round, which is what everyone else is doing."
This new approach to the TV-internet relationship highlights the malleable nature of 'soft' media products. At the same time, it also shows why investors might shy away in favour of more traditional investments such as property. EMCP hopes to ensure that eventually, the TMT sector is as transparent and accessible to investors as real estate is today.
Buyers: Bain and Thomas H. Lee
Bought Clear Channel Communications
US $25.7 billion
The deal was announced in 2006 and is anticipated to close soon after a proposed shareholder meeting in the Autumn.
Buyers: Blackstone, Carlyle, Permira and Texas Pacific
Bought Freescale Semiconductor
US $17.6 billion
The consortium of buyers completed the largest ever buyout in the technology sector in 2006.
Buyers: Apax, Blackstone, KKR, Permira and Providence
TDC (Danish telecom)
US $13.9 billion
The buyout of the Danish telecom giant in 2005 is Europe's biggest private-equity deal so far.