M&A Outlook: What's Next After the 2020 Boom?

Looking back at any calendar year for mergers and acquisitions within the corporate world, it's natural to focus on the most substantial and attention-grabbing transactions – and 2020 featured a significant number of these. I have documented 34 acquisitions throughout the year thus far. Fifteen of these transactions had a value of $1 billion or greater, twelve were of a size that didn't necessitate public price disclosure, and the remaining transactions were valued between those figures.

A total of four mergers involving companies in the semiconductor industry reached a combined value exceeding $100 billion. While the chip sector is particularly known for high-value M&A activity, other industries also saw notable deals, most prominently Salesforce’s acquisition of Slack earlier in the month for $27.7 billion.

Despite the prominence of these larger transactions, I found the smaller, pandemic-influenced acquisitions that began to emerge in May to be particularly noteworthy. These smaller acquisitions are typically not large enough to require public disclosure of the purchase price. They generally involve the acquisition of nascent companies by financially stable organizations seeking to obtain specific technologies or specialized engineering expertise, often in fields such as cybersecurity or artificial intelligence.

2020 was undoubtedly a busy year for M&A, and further activity is still possible. Let's explore the reasons why these smaller deals were so compelling, compare them to the larger transactions, and consider potential trends for M&A in 2021.

Early-stage challenges

Determining the precise motivations behind an early-stage startup’s decision to relinquish its independence through a sale to a larger organization is often difficult, but we can offer some potential explanations for the surge in transactions that began in May of this year. While the reasons these companies opted for acquisition remain uncertain, it is known that the pandemic’s impact intensified in the United States during April, leading to widespread economic closures.

Certain startups faced particular difficulties, notably those with limited financial reserves around April. Companies inevitably cease operations when they exhaust their funding, and we observed an increase in the acquisition of early-stage companies in the subsequent month.

Although a definitive link between the economic difficulties of April and the subsequent increase in deals starting in May cannot be confirmed, a connection is plausible. It’s likely that some of these sales were conducted quickly, or at least under unfavorable conditions. Others may have lacked the capacity to continue operating amidst such challenging economic circumstances, or found the potential partnerships too advantageous to decline.

It is noteworthy that no transactions were reported in April. However, starting on May 7th, Zoom acquired Keybase for its encryption capabilities; five days later, Atlassian purchased Halp for Slack integration; and the following day, VMware acquired Octarine, a cloud native security startup – marking the beginning of a trend. While larger companies clearly gained from these acquisitions, the timing was significant.

The standard explanation given for any sale is that the company will now be able to expedite its development plans and achieve more with the resources of a larger organization than it could independently. While this explanation often contains some validity, the reality is typically more complex and driven by mutual benefit. Both parties involved have specific needs, and the transaction addresses those needs, whether through financial resources or technological assets.

However, not all transactions were small in scale, so a comparison with larger deals is warranted.

Established Businesses Realizing Returns

Of the 15 transactions I examined this year exceeding $1 billion, the first was Cisco’s acquisition of Thousand Eyes for precisely one billion dollars – also occurring in May. The most substantial deal I followed was AMD’s purchase of Xilinx for an impressive $35 billion. It should be noted that the largest transaction of the year involved Nvidia’s acquisition of ARM for $40 billion, but that was reported on by my colleague Danny Crichton.

Excluding the consolidation within the semiconductor industry, the largest deal in terms of value was the acquisition of Slack by Salesforce. With a price tag of nearly $28 billion, this stood out as a significant transaction for a software-based company. In an article co-authored with Alex Wilhelm upon the announcement of the acquisition, we determined that Slack’s financial performance was sufficiently uncertain, suggesting a higher likelihood of a sale than might be initially apparent.

Beyond this major agreement, Koch Industries acquired Infor for $13 billion. Insight Partners purchased Veeam for $5 billion, and Twilio acquired Segment for $3.2 billion. Additionally, the $5.3 billion Visa-Plaid deal is currently facing challenges with regulatory approval, and its completion remains uncertain.

The rationale behind an early-stage startup’s decision to sell isn’t always immediately clear, but it becomes more understandable when presented with a multi-billion dollar offer for their company. This principle applies to both direct sales and private equity scenarios, such as Insight’s purchase of Veeam, as well as instances where companies like Twilio and Segment merge to achieve greater collective strength.

Concerning the four transactions involving chip manufacturers, despite the considerable amounts involved, these deals typically require a prolonged period for completion due to the rigorous regulatory reviews they undergo. It is conceivable that the finalization of these mergers may not occur in the near future. The Nvidia-ARM deal, for example, could take as long as two years to navigate the necessary international approvals. The remaining three could take between six and eighteen months to finalize.

Nevertheless, these transactions demonstrate companies within a well-established sector striving for a competitive advantage by acquiring complementary assets at a significant cost to address gaps in their product development plans. This represents another example of achieving greater competitiveness through collaboration than through independent operation. What implications does this hold for the year 2021?

2021 M&A predictions

Although the outlook is more positive due to the development of several potential vaccines, determining when conditions will fully return to normal in 2021 remains uncertain. A gradual economic recovery is more probable throughout the year, rather than an immediate shift to a post-COVID environment.

Consequently, we anticipate that companies in earlier stages of development will likely seek opportunities to realize value during the first half of the year. While economic improvement is expected as the impact of COVID-19 diminishes, the pace may be insufficient for startups facing cash flow challenges or operating within industries negatively affected by the current economic climate.

Concerning companies in later stages, including established public SaaS businesses, we might observe some being acquired as larger organizations, such as Salesforce, continue to explore strategies for adapting to evolving market conditions. However, these companies must carefully consider potential antitrust implications, as aggressive acquisition strategies to gain market control can attract government scrutiny, as demonstrated by the Visa-Plaid situation.

Regardless of these factors, companies like Box or Egnyte, which may not have previously been considered, could become attractive targets for Salesforce if it aims to more directly compete with Microsoft and Google by offering a comprehensive suite of tools, including storage capabilities. Alternatively, Salesforce, or a comparable large entity, might explore expanding its automated workflow offerings through an acquisition of an RPA company such as UIPath or Blue Prism.

It is consistently worthwhile to monitor the activities of AMOSS (Adobe, Microsoft, Oracle, SAP, Salesforce) due to their inherent tendency to acquire other businesses. Amazon, Google, Cisco, VMware, and ServiceNow should also be included in this group.

The news may not always focus on acquisitions by larger companies; instead, we could see multiple smaller SaaS companies merging. Zoom, benefiting from a substantial market capitalization, might seek to acquire complementary businesses to broaden its offerings beyond meeting software. While the specific form this might take is unclear, it remains a distinct possibility.

We expect to see further consolidation across various industries, mirroring the trend observed in the chip industry in 2020, although perhaps not to the same extent or at the same cost. RPA appears to be one such market ripe for consolidation, with numerous companies competing for leadership. SAP’s recent announcement of its own RPA tool highlights the growing interest from major industry players. These companies are all actively involved with low-code workflow tools, and RPA can be viewed as a logical extension of that functionality.

As always, we will continue to report on any developments, including unexpected deals – similar to the Slack-Salesforce acquisition last year – as the cycle of company creation and subsequent acquisition by larger corporations continues, often involving substantial financial transactions.