Looking ahead after 2020’s epic M&A spree

When we examine any year in enterprise M&A, it’s tempting to highlight the biggest, gaudiest deals — and there were plenty of those in 2020. I’ve written about 34 acquisitions so far this year. Of those, 15 were worth $1 billion or more, 12 were small enough to not require that the companies disclose the price and the remainder fell somewhere in between.

Four deals involving chip companies coming together totaled over $100 billion on their own. While nobody does eye-popping M&A quite like the chip industry, other sectors also offered their own eyebrow-raising deals, led by Salesforce buying Slack earlier this month for $27.7 billion.

We are likely to see more industries consolidate the way chips did in 2020, albeit probably not quite as dramatically or expensively.

Yet in spite of the drama of these larger numbers, the most interesting targets to me were the pandemic-driven smaller deals that started popping up in May. Those small acquisitions are the ones that are so insignificant that the company doesn’t have to share the purchase price publicly. They usually involve early-stage companies being absorbed by cash-rich concerns looking for some combination of missing technology or engineering talent in a particular area like security or artificial intelligence.

It was certainly an active year in M&A, and we still might not have seen the last of it. Let’s have a look at why those minor deals were so interesting and how they compared with larger ones, while looking ahead to what 2021 M&A might look like.

Early-stage blues

It’s always hard to know exactly why an early-stage startup would give up its independence by selling to a larger entity, but we can certainly speculate on some of the reasons why this year’s rapid-fire dealing started in May. While we can never know for certain why these companies decided to exit via acquisition, we know that in April, the pandemic hit full force in the United States and the economy began to shut down.

Some startups were particularly vulnerable, especially companies low on cash in the April timeframe. Obviously companies fail when they run out of funding, and we started seeing early-stage startups being scooped up the following month.

We don’t know for sure of course if there is a direct correlation between April’s economic woes and the flurry of deals that started in May, but we can reasonably speculate that there was. For some percentage of them, I’m guessing it was a fire sale or at least a deal made under less than ideal terms. For others, maybe they simply didn’t have the wherewithal to keep going under such adverse economic conditions or the partnerships were just too good to pass up.

It’s worth noting that I didn’t cover any deals in April. But, beginning on May 7, Zoom bought Keybase for its encryption expertise; five days later Atlassian bought Halp for Slack integration; and the day after that VMware bought cloud native security startup Octarine — and we were off and running. Granted the big companies benefited from making these acquisitions, but the timing stood out.

The stock answer when any company sells is that it will now be able to accelerate its road map and do so much more with the resources of a larger company than it could have by continuing on its own. While there is usually some shred of truth to any cliche, it’s always more complicated and transactional than that. Each side needs something and the other is providing it, whether it be cash or technology.

But not all the deals were modest, so let’s compare them with the heftier ones.

Mature companies cashing out

The 15 deals I covered this year that broke $1 billion started with Cisco acquiring Thousand Eyes for an even billion dollars — also in May, by the way. The most expensive deal I covered was AMD buying Xilinx for a whopping $35 billion. It’s worth pointing out that the biggest deal of the year was Nvidia snagging ARM for $40 billion, but my colleague Danny Crichton covered that one.

If you subtract the chip company consolidation, it means the leader of the deal-size pack was the Slack-Salesforce acquisition. At almost $28 billion, the price tag stood out for a software company. In the article Alex Wilhelm and I wrote when the acquisition was announced, we found that Slack’s underlying financials were squishy enough that it looked more ripe to sell than you might have thought.

Moving beyond that megadeal, we had Koch Industries buying Infor for $13 billion. Insight Partners buying Veeam for $5 billion and Twilio nabbing Segment for $3.2 billion. We also had the $5.3 billion Visa-Plaid deal, but that’s caught up in regulatory red tape right now and it’s unclear if it will be approved.

It’s not always easy to see why an early-stage startup decides to sell, but it’s easier to understand that when someone offers you billions for your company, there’s a good chance that are you’re going to take it. While the outcomes are different, that also goes for a private equity situation as when Insight bought Veeam or two similar companies like Twilio and Segment coming together to build something bigger together.

As for the four chip company deals, in spite of the large sums involved, these deals tend to take a long time to finalize because of the intense regulatory scrutiny involved. It’s possible that we might not actually see these companies come together any time soon. The Nvidia-ARM deal could take up to two years to complete the gauntlet of international approvals required to close the deal. Meanwhile, the three others could take anywhere from 6-18 months.

Regardless, they show companies in a mature industry trying to gain an upper hand by buying pieces for substantial cost to fill in holes in the product roadmap. It’s another case of being more competitive together than apart. So what does this all mean for 2021?

2021 M&A predictions

While the future looks brighter than it has in some time with multiple vaccines vying for approval, it’s hard to know exactly when we will return to normal in 2021. It’s likely that we will have some sort of rolling economic improvement throughout the coming year, rather than suddenly finding ourselves post-COVID from one day to the next.

Because of that, for the first six months we are probably going to continue seeing more early-stage-ish companies cash out. While the economy should improve as COVID recedes, it might be too slow for startups running low on cash or are stuck in industries that are not well-suited to the economic climate.

As for the later-stage companies or even more mature public SaaS companies, we may see some of these come off the board as larger companies like Salesforce continue to look for ways to redefine themselves in a shifting landscape. These companies just need to watch for antitrust concerns as that happens. The government sometimes takes a dim view of using brute force buying power to control markets (see the Visa-Plaid deal).

Regardless, that could mean a company we hadn’t considered like Box or Egnyte might capture the CRM giant’s attention if it were to want to compete more directly with Microsoft and Google with a full set of tools that includes a storage component. Perhaps Salesforce or a similarly large company could look at expanding automated workflow with one of the RPA companies like UIPath or Blue Prism.

It’s always worth watching AMOSS (Adobe, Microsoft, Oracle, SAP, Salesforce) because they are highly acquisitive by nature. You can throw in Amazon, Google, Cisco, VMware and ServiceNow into that group as well.

Perhaps it might not be a bigger company making all the headlines, but two or more smaller SaaS companies combining forces. Zoom, with its fat market cap, could go shopping for complementary pieces to make it more than meeting software. It’s hard to know how that might manifest itself if it decides to go that route, but it’s a possibility at least that it could happen.

We are likely to see more industries consolidate the way chips did in 2020, albeit probably not quite as dramatically or expensively. RPA seems like one such market that could stand consolidation with several similar companies vying for dominance. It’s interesting to note that SAP announced its own RPA tool this month, which shows it’s getting the attention of the major players. Certainly, they are all involved with low-code workflow tools now, and RPA could be seen as a natural extension of that.

As always, if any of this happens, or if any deals we couldn’t even fathom (like Slack-Salesforce at this point last year), we will be there and we will be covering them as the cycle continues in which companies are built and larger companies suck them into the giant corporate machines, often for enormous sums of cash.