Emergence Capital
Emergence Capital partner Kara Egan
- The first half of 2019 was dominated by mega-deals in
enterprise software, with Salesforce scooping up Tableau for $15.7 billion and Google acquiring Looker for $2.6 billion. - In conversations with Business Insider, several of Silicon Valley's biggest enterprise venture investors said they expected the blockbusters to continue in what they see as a boom-bust cycle for acquisition activity.
- Jerry Chen, a partner at Greylock, pointed to the unwieldy size of companies like Salesforce and Google that used to be known for having a startup mentality but are now the "old guard" trying to keep up with smaller competitors.
- Some investors also alluded to the scrutiny on consumer companies like Facebook to explain why most of the acquisition activity has been contained to enterprise companies.
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In June, Salesforce shelled out an eye-popping $15.7 billion to buy data analytics startup Tableau. Only a few days before, Google grabbed headlines when it purchased a separate data analytics startup called Looker for $2.6 billion.
Safe to say, the first half of 2019 has been boom times for enterprise acquisitions.
While not the largest software acquisitions of all time - that distinction goes to IBM's $34 billion takeover of open source startup Red Hat in October - the flurry of activity has gotten the attention of some of Silicon Valley's biggest enterprise investors.
"Like all things, it comes in cycles," Greylock partner Jerry Chen told Business Insider of the acquisition activity over the last few months. "Each cycle is bigger than the last one because you are standing on the shoulders of incumbents."
The increased activity was an outcome many industry experts expected when the 2017 tax reform bill lowered the corporate tax rate and freed up some capital for a shopping spree.
"These major tech companies have a ton of cash, just sitting there," Kara Egan, a partner at Emergence Capital, told Business Insider. "And yeah, maybe they'll need it in the downturn of the economy, or maybe all these things become cheaper and they also buy."
New era, new incumbents
Mergers and acquisitions have long been part of large corporations' strategic initiatives, especially in businesses where innovation and change are part of the competitive landscape. The tech industry has been among the most active dealmaking sectors for decades, with deep-pocketed, established giants like Cisco, IBM and Microsoft using their balance sheet or their equity to snap up a never-ending parade of young competitors.
Now, as enterprise computing has increasingly moved to the cloud, a new wave of big buyers has been established.
"Salesforce, Google, and Amazons' cloud are the new incumbents," Chen told Business Insider. "It used to be IBM and HP, but now Salesforce, Google, and Amazon are the category-defining companies in data services and cloud technology. They have the size, scale, and reach that give them that dominant position."
Justin Sullivan / Getty Images
Salesforce CEO Marc Benioff
With that dominant position comes increased competition, and for the biggest companies, acquisitions can provide a quick way to stay ahead of the curve in the fast-moving tech market.
"Cloud providers [are] choosing buy-over-build to catch up with AWS," March Capital partner Jed Leidheiser told Business Insider.
The track record of acquisitions in the corporate world that are ultimately deemed to have been successful is mixed, but in tech especially, it's not difficult to see the appeal. For the purchasing company, it's an easy way to cut off potential competition while snagging the creative team that founded the startup, the technical talent, and the intellectual property. The startup's founders get a nice payday and in the best cases, autonomy to run their company with the safety net of a large corporate parent.
Bigger market opportunities
The other undercurrent many investors pointed to is the changing sales landscape for enterprise software. Instead of selling software directly to a company's IT departments, companies like chat app Slack go bottoms-up by appealing to the workforce which then pressures the company to purchase a subscription.
"Zoom started as a consumer product, actually, and now they're enterprise grade," Egan said. "So these startups definitely have enterprise products that are ready to be bought."
Mark Lennihan/Associated Press Zoom IPO
According to Mayfield partner Rajeev Batra, this sales tactic opens the door to larger valuations because companies are reaching so many more customers than they had in the past.
"These acquisitions speak to how core innovation has been abdicated to the startup world," Batra said. "This is a major shift compared to a few years ago and is now reflected by the collective market cap of younger public and unicorn enterprise software companies compared to the giants."
Driving this tactic is the so-called consumerization of the enterprise, in which the line between business software and personal apps becomes increasingly blurred.
But as one investor pointed out, large consumer companies like Facebook aren't making any acquisition moves. The investor said that regulatory scrutiny is largely to blame, and companies like Oracle and Salesforce have been able to stay out of that conversation which lets them think more broadly about strategic acquisitions.
"You're not seeing many people who think that Facebook will buy another Instagram," the investor said.
