Q: What are the primary reasons for corporate mergers?
There are a lot of nuances here, but the simple reason for most really big acquisitions is a BigCo has fallen behind. Not necessarily in revenue, and often not in their core market. But in a related market that becomes strategically important.
So they want to catch up, and oftentimes, fast. And note this is different than fear. Successful BigCos aren’t scared. They know the next 5-7 years will be mostly, just fine. But they do want to catch up. Because you can’t do everything. And sometimes, the areas you choose not to play in today, are areas you want to win in later.
- Okta basically won the corporate side of identity (rocketed to #1) but wasn’t #1 on the developer side. So it is buying Auth0 for $6.5B. Then it will be #1 in both.
- Facebook won the core social graph but didn’t dominate in messaging. So it bought WhatsApp for $21B.
- IBM couldn’t catch up in the Cloud so it bought RedHat, the largest open-source player, for $34B. Not a perfect answer, but it instantly made them relevant in one key segment of the Cloud.
- Twilio wanted to own more of messaging, to dominant messaging, so it bought the leaders in email APIs (Sendgrid) and communication data / intelligence (Segment). These were markets that didn’t seem core a ways back, but became important adjacent markets as Twilio grew to $2B ARR and beyond.
- Salesforce won the customer record but didn’t dominate in communication across those records — a big gap. So it bought Slack for $27B.
You catch up. Some M&A is opportunistic. Some is highly defensive. Smaller deals can sometimes just be about experiments, and teams. But most Big M&A is about catching up. A CEO or an SVP catching up.
- How do you catch up — fast? You buy the leader. You catch up in just a few months, as soon as the deal can close.
- How do you catch up — partially? You buy #2-#5 in the space.
- How do you at least gain a year or two? Buy a pre-revenue startup in space with a strong team.
You could look at these deals otherways, but really, they let a BigCo catch up fast in a key space they got behind in, or never won in … and later felt they needed to.
Not a bad play.