The era of big M&A is over for Big Tech
But will regulators spot which smaller deals define the next phase of competition?
Big Tech is still in the M&A business — but only just.
Blocking the use of acquisitions by the largest US technology companies to consolidate their power has become an overt goal of many regulators and politicians. So it is telling to note that, in aggregate, the amount the leading tech companies spent on buying up other businesses tailed off last year.
But even if the headline-grabbing takeovers have been few and far between, the smaller deals are still flowing as the tech leaders round out their capabilities in key areas. And a diminished deal-flow may not make much difference to their headlong expansion into new markets: acquisitions had already come to play only a small part over the past half-decade.
It was easy to miss news earlier this week that Big Tech’s largest acquisition of 2019 had slipped through, unheralded. It came on the latest earnings call from Google parent Alphabet. Explaining the reason for a jump in headcount in the final months of last year, the company pointed to the December closing of its $2.4bn purchase of Looker as a factor in the increase.
A well-regarded data analytics company, Looker has been folded into Google’s cloud computing division. This is a market where Google is well behind Amazon and Microsoft, so it’s not as though Google was acting to freeze others out of the market.
But the deal was still enough to attract the attention of regulators: the UK’s Competition and Markets Authority said it was open to hearing comments from anyone who thought this deal would hurt competition. The deal closed with that preliminary review still going on, meaning that Google cannot integrate Looker into its business until the regulators have had their say.
That the relatively small acquisition of a little-known analytics company should be the most prominent deal by a group of companies sitting on hundreds of billions of dollars in cash speaks volumes about the limited M&A ambitions of Big Tech.
Regulatory filings in recent days show that the five most valuable US tech companies — Apple, Microsoft, Amazon, Alphabet and Facebook — spent only $7.2bn between them on acquisitions last year. That is only around half as much as each of the previous two years, and well below the $29bn of 2016.
So does this show that they are running scared of the trustbusters? Perhaps. But it’s not as though a critical avenue of growth has just been closed off to them.
For a start, big acquisitions have been scarce lately. Over the past five years the number of transactions worth more than $1bn can be counted on the fingers of one hand. Besides Google’s Looker deal and its $1.1bn purchase of parts of HTC’s smartphone business, they comprise Microsoft’s acquisitions of GitHub ($8.4bn) and LinkedIn ($27bn), and Amazon’s of Whole Foods Market ($13.2bn).
You have to go all the way back to 2014 to find a year when the Big Tech M&A departments were all working full-swing. Along with Facebook’s purchases of WhatsApp and Oculus, acquisitions that year included notable names such as the smart home company Nest (by Google), the headphone maker Beats (Apple’s biggest deal), the games streaming company Twitch (Amazon) and the video game Minecraft (Microsoft).
These deals point to one type of acquisition that regulators hope to head off in future: those that enable today’s leaders to dominate the next big markets when they are still in formation.
But are regulators in any position to make accurate judgments about what those new markets will be, and which small acquisitions will provide the key to unlocking them? It will also be hard to ban deals in the booming cloud computing market, where an oligopoly has been forming. As the UK’s review of Looker shows, the regulators are sure to kick the tires to see what is permissible as new tech markets take shape. Whether they will act is another question.
At the other end of the size scale are the many smaller deals that slip under the radar, but which have been instrumental in consolidating Big Tech’s grip on important new technologies. Chief among these is AI. Since Beats, Apple has spent less than $1bn a year on dealmaking — but it has been mopping up small AI companies as it tries to match the big lead of Google and Amazon.
The next phase of competition in the tech sector probably won’t be defined by megadeals. But that doesn’t mean M&A won’t play an important part in shaping how Big Tech consolidates its position.