Will There be an Explosion of New Acquisitions?
Are we on the Verge of Acquisition-Mania?
While much of the world has been zoomed in on pandemic mitigation efforts, civil unrest, and an overreactive stock market, the change of fortunes in tech are worth paying attention to. Facebook, Amazon, Apple, Netflix, Google, and Microsoft have in hand the perfect ingredients of change along with the financial strength to scoop up companies with synergies that can lead to expanded services, higher profits, and fewer competitors.
Based on the acquisition activity of these giants over the past couple of months, it seems management has adopted an aggressive pro-active posture similar to that of past recessions. Memorable examples of tech acquisitions from previous downturns include IBM in the 1990s that readjusted its business focus to software and service rather than mainframes and hardware. Some of the acquisitions they made during this period included Lotus, Tivoli, and Unison. During the dot-com bust after the turn of the millennium, two little known companies named Google and Facebook began to rise to the prominence they enjoy today. Another company that decided to get aggressive during the Y2K downturn was Apple. It doubled its research and development in 2001 and 2002. The outcome was the introduction of quickly adopted music storage technology, and later, smartphones. Big tech has been served well by aggressively planning to be even stronger when the economy recovers.
What Big Tech has an Appetite For
The pandemic has pushed to the forefront new or expanded consumer needs that have provided clear demand and opportunity. Under the category of telecommunications alone, the requirements of companies to electronically meet with remote employees or even clients they’re building relationships with is worth billions. Couple that with entertainment technology and online retail needs, and the potential for massive leaps forward in business growth is possible, even for a current giant. But only for those companies positioning themselves to shape tomorrow's standards. Facebook’s CEO Mark Zuckerberg said in an investor call in May, “I’ve always believed that in times of economic downturn, the right thing to do is keep investing in building the future. When the world changes quickly, people have new needs, and that means there are more new things to build.” Facebook and the others clearly ramped up activity when the lockdown began.
Cash for transactions is not a problem for the largest tech companies. And their high stock valuations could provide additional “currency” for acquisitions. At the end of 2019, the combined six tech companies were sitting with $557 billion. This pile of cash allows each in the group to go shopping for the best fit for their projections of how the future will look. They can create strategies of how their business will provide for it, then build or buy the missing pieces. According to PricewaterhouseCoopers, these firms have been among the top spenders on research and development for most of the last decade.
As Netflix, Amazon, and the other tech companies adapted to their own employees working remotely, they experienced a spike in their services from others in the country doing the same. The demand of messaging and other teleconferencing software and platforms had spiked.
The world is changing, and many of the new or expanded needs are already obvious. Since March, Microsoft has quickly acquired three cloud computing companies with a variety of capabilities to augment their current services of providing technology to business.
Amazon, which relies on its employees interacting with others, was at once overwhelmed with a surge of online orders. They dealt with the safety concerns of its workers first in part by investing in 175,000 new employees. Then they made their corporate shopping list. According to The Wall Street Journal, Amazon is now in advanced talks to buy an autonomous (driverless) vehicle startup named Zoox. The purchase price is estimated to be between $2.7 billion and $3.2 billion. And, while air transportation dropped almost overnight in response to the pandemic, Amazon placed 12 Boeing 767s in its shopping cart and hit the “Buy Now” button. The online retailer is now equipped with substantially more capacity than ever -- acquired at a discount.
Apple is sitting on $193 billion, they’ve scanned their business environment and found four attractive opportunities to swipe right on. In the past few months, they have acquired; DarkSky, a popular weather app for all make smartphones. They picked up Voysis, a digital assistant and speech recognition software company, and Xnor.ai, an artificial intelligence startup. Apple made an acquisition in NextVR that demonstrates their belief in the future. NextVR is a virtual reality (VR) provider that marries live sporting events with VR through various headsets. An Apple virtual developer conference is in the works.
Facebook’s activity skyrocketed in March as they were one of the first platforms people flocked to for voice and video chat to keep in touch with others. In April, Facebook said it was taking a $5.7 billion stake (10%) in India’s Reliance Jio, a streaming service where Facebook expects to set up a digital marketplace serving Asia. According to a June 17 Bloomberg article, the investment is being reviewed under India’s antitrust regulations.
In May, Facebook bought Giphy for an estimated $400 million. Giphy will become part of its Instagram platform. Their expansion in Asia grew earlier this month as they made a large investment in digital payment app Gojek. Gojek now serves 170 million people in South East Asia.
Also announced this month, Facebook has plans to create a new venture capital fund and is hiring seasoned tech investors. The plan seems to be to selectively fund startups and perhaps later have access or visibility of the firms that offer the most potential. Facebook recently posted this job opening:
Hiring: New Product Experimentation (NPE) team, ideally 10-years of tech experience.
"In this role, you will manage a multi-million dollar fund that invests in leading private companies alongside top venture capital firms and angel investors,"
"You will develop investment and impact theses, lead the execution of new investments, and support existing portfolio companies as needed."
Facebook has confirmed they have hired someone to fill the role.
Google, too, updated products that people can use to work from home. In April, it said that its video chat service, Google Meet, would be available inside people’s Gmail window and free to anyone with a Google account. It also said it would bolster e-commerce searches by making listings in its shopping search results mostly free, rather than have merchants pay for all their products to appear in the results.
Tech isn’t the only industry strengthening or expanding their business offerings. Biotech, pharma, retail, and finance, are as well. In late May, Merck announced it would be acquiring Themis; a company focused on vaccines and immune-modulation therapies for infectious diseases. Roche acquired Stratos Genomics to possess their one-hour DNA sequencing technology. Grubhub was picked up by Just Eat Takeaway.com, which creates new operations in the U.S. for the entry into online food delivery in the United States. Esports acquired the private company LHE Enterprises to capitalize on the surge in online gaming interest. As larger companies in different industries have more clarity of the future business environment, we may see even more non-tech acquisitions.
This period in history will likely be remembered for bringing an acceleration of change. Companies are looking to capitalize on clear trends that are expected to last well after the current challenges. Investors, for their part, can take their own steps to capitalize on new consumer demands. Research of smaller companies that may become acquisition targets could uncover investment opportunities.
Tech is the most notable group making acquisitions to reshape and benefit from a changing world, but there are others. Companies in any industry, which are aggressively seizing the opportunity and perhaps letting go of old ways, could find themselves more powerful when the pandemic resolves itself.
Investors holding shares of firms targeted for acquisition may never see their company grow into the next behemoth like Apple. This is okay -- finding the next “Apple” isn’t as easy as finding small innovative companies that Apple may become interested in owning.
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Sources:Facebook’s Deal With Jio Under Indian Antitrust Review