Quick Thoughts: Who Will Buy?

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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January 9, 2020

Quick Thoughts: Who Will Buy?

  • 2019 was a down year for tech bankers. In pure tech, CRM’s $15.7B DATA buy topped the list, followed by NVDA’s $6.9B deal for MLNX, and VMW’s $4.8B purchase of PVTL and Carbon Black. The FIS acquisition of WP for $34B was the biggest of several deals in the tech adjacent payments arena.
  • 2020 could be more active, as cash rich mega-caps look to accelerate moves into new markets and as high growth players look to gain further scale through consolidation.
  • SaaS, Cloud Tech, Security, FinTech, Health Care, Gaming, Sensors and Autonomous Driving could all see significant deals.
  • GOOGL, with its hand in many opportunities and with Sundar Pichai elevated into the CEO seat, may be the most aggressive, with the late 2019 Fitbit acquisition just a taste of deals to come.
  • AMZN and MSFT were quiet in 2019 but could step up in 2020. Software players CRM, ADBE, ORCL, WDAY and others should also be active shoppers. AAPL is typically cautious on M&A, while FB may not want to raise further scrutiny.
  • We review the possible shopping lists for the biggest potential buyers, both what we think they SHOULD buy and what we think they might buy.

A new year sparks a lot of speculation. We recently published our “Ten Investible Things That We Think Will Happen in 2020”, some of which hint at possible M&A activity. 2019 did not have any huge transformative acquisitions, such as 2018’s TMUS/S or IBM/RHT deals or 2017’s AMZN/WFM combo. The biggest tech deal was CRM’s acquisition of DATA for $15.7B – decent sized in price but not particularly transformative for the buyer or the industry. In the tech adjacent space, FIS spent $34B on WP to complete a major consolidation of merchant acquirers that drove significant outperformance for many investors.

It is fun to imagine what deals might be on the boardroom table in 2020. Here are some thoughts on what some companies ought to be considering along with what we think they might realistically buy:


Should Consider: With a $154B cap and a hefty potential deal premium, Salesforce is almost certainly too big, but it would have been a great fit a couple of years ago. New Google Cloud head Thomas Kurian could use a few more tools in his bag, so perhaps a well-run SaaS application leader with ambition to get bigger – like Workday or Service Now. Other SaaS names that could fit – Splunk, Alteryx, Atlassian, Slack or Twilio.

Exh 1: Summary of acquisitions by Google in the last 2 years

We also believe that Google Cloud needs to better differentiate vs. AWS and Azure. Hybrid Cloud software specialist Nutanix would be a great pick up at a reasonable price. Security is another way to enhance Google’s enterprise pitch – Palo Alto Networks with its focus on comprehensive cloud-based security could be the ticket.

Google should also look at FinTech and e-commerce (Exhibit 1). Imagine if it could combine Shopify and Square into a powerhouse retail solution to counter archrival Amazon. In a crazy world, Google could make a play for Visa or Mastercard. In health care, privately held WebMD would seem a good fit with the company’s ambitions. We’ve long thought Twitter would be an interesting play for Google, adding greater timeliness to search and generating greater reach for the information distribution network. Pinterest could add both social networking and a new vehicle for driving e-commerce.

Gaming is an interesting area for Google – YouTube battles with Apple’s Twitch for game streaming and e-sports, Google Play splits the mobile game distribution racket with Apple, and Google Stadia is an early play in streaming game play from the cloud. Two private companies, Valve (which owns the dominant Steam online distribution platform and offers game development tools in addition to publishing its own games) and Discord (a fast-growing social network and communications platform for gamers) should be on the top of the list for any company interested in tapping into the 10-15% annual growth in gaming spending. Finally, the recently announced CHIP alliance with Amazon, Apple and the Zigbee Alliance suggests potential for real movement in the “smart home” ideas that have been aspirations for many years. iRobot (with connected vacuums, pool cleaners and lawnmowers) and Sonos (pioneering connected home audio) would make a lot of sense for Google.

Likely Targets: Google will almost certainly make acquisitions to beef up its enterprise cloud offerings. Nutanix makes a LOT of sense – the price tag would likely be less than $10B, the products would boost Google to a strong position in hybrid cloud, and there are key Nutanix vets already working at Google while the CTO of Google Cloud sits on the Nutanix board. Cloudera, Splunk or Alteryx could be interesting fits with Google’s strong internally developed analytics tools, at prices below $10B. We are less optimistic about deals for public companies in fintech and healthcare – more likely Google will shop for interesting startups to add talent and tech to its own internal initiatives. Still, the Fitbit deal shows management is willing to think outside of the box. In that spirit, adding iRobot and/or Sonos to its modest line of smart home devices (Nest thermostats, smoke detectors, home hubs, etc.) would raise the stakes vs. Amazon.


Should Consider: Amazon has begun offering its own health plan to employees in Washington state, a test for a more ambitious plan with partners JP Morgan Chase and Berkshire Hathaway. The company could jumpstart things with deals – privately held Teladoc is the biggest telemedicine player and start-up Oscar has begun building out a tech-forward healthcare platform, Diplomat, a stand-alone specialty pharmacy that could dovetail with Amazon’s Pill Pack online pharmacy (Exhibit 2). We believe that acquisition of a major competitor in brick and mortar retail, like CVS Caremark would be impractical on an antitrust basis. The same would likely be true for companies like Shopify or PayPal, which help to facilitate e-commerce competition to the Amazon’s dominant online shopping platform. International e-commerce plays, like MercadoLibre or JD.com, would be no-brainers for Amazon at the right price IF such deals could pass regulatory scrutiny in all markets.

Amazon could make deals to extend its reach into the home beyond Echo hubs, Fire TV sticks and Ring doorbells. The companies that we noted as interesting for Google – iRobot and Sonos – would also be interesting for Amazon. An online travel agent, like Expedia, would mesh well with Amazon’s e-tail store and its growing Alexa franchise. Spotify could enrich the media offerings bundled with Prime and draw younger demographics into the membership program. The company has been relatively quiet on gaming since acquiring the streaming platform Twitch in 2014. With cloud rivals Microsoft and Google showing heightened interest in the market of late, Amazon could bid for Valve and/or Discord.

Finally, AWS has been losing some ground to Azure in the cloud hosting race, with Microsoft able to leverage its much more extensive enterprise IT software portfolio, existing relationships and ample salesforce. We think AWS should look at ways to move up the software stack and to expand its presence in enterprises. SaaS analytics and infrastructure software, such as MongoDB, Splunk, or Alteryx would make sense.

Likely Targets: Amazon is not shy about acquisitions – if management shares our thoughts on priorities and a fair deal can be struck, any of the companies mentioned in our “should consider” list could be on the table. We see deals in healthcare, connected home products and cloud software as the most likely – perhaps Teladoc, Diplomat, Sonos and/or MongoDB

Exh 2: Summary of acquisitions by Amazon in the last 2 years


Should Consider: Azure has been on a roll, gaining 350bp of share vs. AWS in 2019 and outpolling the IaaS leader in recent CIO surveys. Consolidating more best-of-breed SaaS applications under the Microsoft banner would add to the momentum – Adobe is now too big to buy, but Workday, Service Now, Zendesk, and Alteryx are not. Really, any of the top SaaS names below a $25B cap could make sense. Security is already an advantage for Azure but with the threat of state-sponsored cyber attacks growing, advanced tools like CrowdStrike, ZScaler or CyberArk would make sense. Okta, which has a dominant position in identity management for security is another strong fit.

Microsoft also plays from strength in Gaming, with leadership in the emerging field of game streaming. Valve, which was founded by Microsoft vets, would be a big deal, as would Discord. We don’t see a big publisher as a good idea – Microsoft doesn’t need traditional distribution and many of the most intriguing players like Epic and Riot are controlled by Tencent. Still, privately held Roblox, with 100M users and a successful user-driven content creation model would mesh nicely with Minecraft (Exhibit 3).

Likely Targets: Microsoft has been an aggressive acquirer, mostly focused on small talent and tech driven deals but occasionally stepping up to expand its market with deals like LinkedIn, Minecraft and GitHub. In addition to the raft of small buys that it will undoubtedly execute, we see security and gaming as the most likely areas for a bigger play, with SaaS consolidation a strong possibility at the right price. The best bets for a 2020 deal could be Valve, Roblox and Okta.


Should Consider: With its massive cash hoard, analysts habitually project big deals like Netflix or Tesla, ignoring the company’s long-established distaste for big, transformative deals. If Apple were going to buy Spotify, they would have done so long ago rather than to pay up now, when management undoubtedly

Exh 3: Summary of acquisitions by Microsoft in the last 2 years

believes that they will beat their Swedish rivals in the long run. A big deal for Apple is unlikely to be a lot bigger than the $3B Beats deal done a few years ago. Still, despite the near certainty that they won’t do a big deal, we can speculate what they SHOULD buy if some magic meteor struck Cupertino and changed Apple culture overnight (Exhibit 4).

We’d start with Sonos – the Apple Hub is a dud while home automation is poised to be a big deal over the next few years. Roku could also be interesting – the Apple TV device is a minor “hobby” that forces the company to rely on others for the distribution of its new streaming AppleTV service into the living room. The Apple Watch is finding its market as a wellness-first device, so beefing up the ecosystem around personal health would make a lot of sense – maybe another suitor for KKR’s WebMD. If Apple is really interested in autonomous cars, it probably needs to step up – ZOOX, which is rethinking the car from the ground up seems the best fit. Stepping out of the box entirely, perhaps Apple should go all in on payments and take out Visa or Mastercard, although getting the most out of a card net deal would involve a more liberal view on monetizing user data. Twitter could really juice Apple News. The craziest play? Maybe Apple should buy Nintendo, which shares its focus on controlling its ecosystem.

Exh 4: Summary of acquisitions by Apple in the last 2 years

Exh 5: Summary of acquisitions by Facebook in the last 2 years

Likely Targets: None of the above. Look for judicious buys of incremental tech and talent at modest prices to add to existing internal initiatives.


Should Consider: Off the bat, we believe it would be impossible for Facebook to acquire further social networking assets given the intense government scrutiny, so Snap, Twitter and Pinterest are off the list. Media could be interesting. Spotify could get a lot of reach within the Facebook ecosystem. Netflix too, but that’s probably too big of a bite. Facebook has always been a bit short on adding commerce to its advertising driven empire – Shopify would have interesting synergies. PayPal, particularly with its Venmo P2P payments platform and cross border focus, could be very interesting as well as Facebook searches for a route to bring its planned Libra cryptocurrency to market.

With Oculus in the fold, gaming and VR/AR are potential plays. Discord is certainly off of the table, but FB could be a surprise bidder for Valve. AR pioneer Magic Leap would also seem a fit with Facebook’s ambitions (Exhibit 5).

Likely Targets: We think Facebook could be reticent to go after big game in the M&A market given all of the saber rattling from governments and candidates about its past deals. IF they do anything big, it will be far afield of its core social networking/advertising franchise. Look for smaller deals in fintech and VR/AR.

Exh 6: Summary of Potential Attractive M&A Targets for Big Tech, by Category


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