Media and entertainment executives use M&A to seize new opportunities

M&E companies are choosing M&A to accelerate market growth and create operational efficiencies.

The recent COVID-19 pandemic is serving as a catalyst for change and strategic action for executives in the media and entertainment (M&E) sector, according to respondents to the latest EY Global Capital Confidence Barometer (pdf).

Although 92% of M&E executives say they experienced a decline in revenue, more than half (53%) expect a return to pre-pandemic levels in 2021. A return to profitability, however, may take longer with 49% of respondents not expecting profitability levels to be restored until 2022.

Industry executives identify the pandemic’s continuing impact as the greatest external risk to their business growth. M&E leaders also face intensifying competition from non-traditional players that are changing the industry landscape. This is especially true for video streaming and digital advertising. This kind of disruption is placing downward pressure on financial performance and market share.

M&E executives also cite the macroeconomic outlook as a risk factor for growth. However, post-pandemic reopenings should drive a sharp and powerful rebound in many M&E subsectors, particularly those with revenue models that rely on in-person gatherings, such as sports stadiums, concert halls, movie theatres and B2B events.

Internal challenges may hamper executives as they seek to execute on strategic priorities

Despite having clarity around strategic priorities, M&E executives are dealing with some very real internal challenges to executing their game plans. Even in the face of massive disruption — or perhaps because of it — M&E leaders are finding that the appetite for change within the organization is uneven. Inertia persists, and change management issues present hurdles to fully engaging employees in embracing transformation.

Interestingly, although 64% believed their company overperformed during the pandemic relative to competitors, M&E executives cite a lack of leading technology as another internal challenge. They have noted an imperative to invest more actively in technologies and digital capabilities — both customer-facing and back-office or operational — perhaps to address this perceived shortcoming.

Some M&E leaders report that the strategy they hope to execute is not implementable, which suggests that their vision may be disconnected from the day-to-day reality of the business.

Finally, with much of the industry transitioning from a fading yet still profitable legacy business to a high-growth model that requires bold action and investment, M&E leaders live in a constant state of tension, balancing the need for transformation with the predictability of current operations.

Media and entertainment executives focus on drivers of change

As M&E companies seek to effect meaningful change to adjust to new market realities, they are emphasizing drivers that will increase profit margins and, ultimately, cash flow. The pivot to a direct-to-consumer distribution model has many M&E companies moving more customer interactions onto fully digital platforms for account activation, transaction activity and customer service.

Similar to front-of-house operations, M&E companies are using technology and automation in the back office to redeploy or replace higher-cost labor roles and improve scalability. And they are willing to divest any non-core or underperforming assets that they identified during their strategic review process.

Triggers for transformation within M&E companies include pandemic-induced factors like loss of revenue or a recognition that the existing operating model lacks resiliency, compounding the stress from unforeseen external shocks. Irrespective of the pandemic, industry leaders are finding that the challenge of attracting and retaining the right talent can be a catalyst for transformation, powering new ways of working or even M&A activity.

Transformation projects announced recently by many M&E companies are grounded in the practical need to reduce expenses and improve operating efficiency to create a more flexible operating model and cost base, releasing trapped resources for reinvestment into growth initiatives.

Technology alignment and business resilience are top-of-mind when considering an M&A target

The pandemic has also affected M&A strategy among M&E executives. Of the 41% of M&E executives who are considering M&A in the next 12 months, 39% are looking to increase operational capabilities, while 35% are seeking bolt-on acquisitions.

Industry respondents cite the need to reassess and rebalance their portfolios. Additionally, when considering an asset, M&E executives say they are placing a sharper focus on a target’s digital strategy and technology alignment and more thoroughly considering its business resilience.

Swings in the capital markets also are influencing transaction valuations, adding a degree of difficulty to deal negotiations. Nearly three-quarters (72%) of M&E executives also expect increased competition from private equity (PE) firms, many of which are sitting on record amounts of dry powder.

M&E companies are poised to thrive following the great pandemic reset

The pandemic has been the great accelerator of change. M&E executives have undertaken the requisite reviews and are poised to execute. Although challenges, both external and internal, may hamper their progress, M&E companies expect to seize the opportunities that arise in a reset competitive, economic, geopolitical and social environment.