Mergers and Acquisitions (M&A) happen at the junction of fear and greed. Generative AI (Artificial Intelligence) has spiraled up both these components perfectly in the minds of mid-sized and large-sized corporations. Since the release of ChatGPT shook the entire world in November 2022, FOMO (Fear Of Missing Out) has gripped the corporate world. In Silicon Valley, I hear discussions predicting that new companies driving search, database, enterprise resource planning, supply chain management, etc., will be cropping up – all based on AI as the foundational layer. Incumbents in these enterprise sectors are feeling the pinch and getting paranoid about their relevance in the new Generative AI-dominated era. Hence, the Generative AI gold rush is ushering in a wave of Mergers and Acquisitions – some at insane price points. But the boards end up approving such acquisitions based on ROI (Return On Investment) over a longer-than-normal extended period of time.
Here are two recent acquisitions that prove the beginning of the Generative AI goldrush wave:
- MosaicML: acquired by Databricks for $1.3 Billion (mostly stock) for 62 employees, which accounts to $21 Million per employee; the company had raised $37 Million in venture funding
- Casetext – acquired by Thomson Reuters for $650 Million for 110 employees, which accounts to ~$6 Million per employee; the company had raised $64 Million in venture funding.
Driving Factors for Generative AI M&A
Corporations are enthusiastic about Generative AI for several reasons. First, Generative AI has the potential to accelerate innovation and creativity by generating new ideas, designs, and content. This can lead to the development of unique data-driven products and services, giving corporations a competitive edge.
Second, Generative AI can automate repetitive tasks, saving time and resources. By utilizing AI models that generate content or perform complex tasks, corporations can streamline processes and increase efficiency.
Additionally, Generative AI can help corporations personalize their offerings by creating tailored recommendations or customized customer experiences. This can enhance customer satisfaction and drive customer loyalty.
Furthermore, Generative AI enables corporations to analyze large datasets and extract valuable insights. By generating synthetic data, AI models can help identify patterns, make predictions, and optimize decision-making processes.
In general, Mergers and acquisitions (M&A) at corporations are driven by various factors, including:
1. Strategic objectives: Companies engage in M&A activities to achieve strategic goals such as expanding into new markets, diversifying their product/service offerings, gaining a competitive advantage, or enhancing their overall growth prospects.
2. Synergy and value creation: M&A deals are often pursued to create synergies, where the combined entity can achieve greater efficiency, cost savings, increased market power, or improved financial performance. These synergies aim to create more value than each company could achieve individually.
3. Market forces and competition: Companies may undertake M&A transactions to respond to market dynamics and stay competitive. Acquiring or merging with another company can help a firm gain market share, eliminate a competitor, or strengthen its position within an industry.
4. Access to new technologies or capabilities: Acquiring companies with complementary technologies, patents, intellectual property, or unique capabilities can provide access to new markets, expertise, or innovation. This can enable corporations to enhance their product/service offerings and stay ahead of emerging trends.
5. Financial considerations: M&A deals are also influenced by financial factors, such as increasing shareholder value, achieving economies of scale, accessing new sources of capital, optimizing capital structure, or improving financial performance through consolidation.
While the specific motivations behind M&A transactions can vary widely depending on the industry, market conditions, company size, and individual strategic goals of the corporations involved, the common underlying themes of capturing the next-generation market, like Generative AI, remain intact across transactions.
Overall, the ability of generative AI to generate novel content, automate tasks, personalize experiences, and analyze data makes it an attractive technology for corporations seeking innovation, efficiency, and competitive advantage in today’s fast-paced business landscape.
Predictions for Generative AI M&A
In the spirit of pushing the boundaries, I’m going to predict which corporations are likely to make major Generative AI acquisitions. To be clear: these are purely my speculations based on public knowledge.
Let’s first look at the big tech corporations and their historic acquisition strategies:
1. Google has made numerous acquisitions across various industries, including artificial intelligence. YouTube, Android, Waze, AdMob, ITA Software, and Looker are among the notable acquisitions.
2. Meta has acquired several companies, including Instagram, WhatsApp, and Oculus, to expand its social media and virtual reality technology offerings.
3. Microsoft has a history of strategic acquisitions, such as LinkedIn, GitHub, and Minecraft, to enhance its developer-side portfolio.
4. Apple has made acquisitions to strengthen its product lineup and technology capabilities, including companies like Beats Electronics, Shazam, and Dark Sky.
5. Amazon has acquired companies like Whole Foods, Ring, and Twitch to diversify its business and expand into new markets.
In the Generative AI sector, Google and Meta are feeling the pinch due to the Microsoft-OpenAI relationship. Microsoft has publicly announced the integration of OpenAI’s products across Azure Cloud, Bing Search, and Microsoft Office suite. So it is not unimaginable that while Google and Meta will push their internal Large Language Model (LLM) development efforts, Bard and Llama 2, respectively, they may also start acquiring companies to hedge their bets. Even though Microsoft has made Llama 2 available in the Azure AI model catalog recently, Meta is at a nascent stage in getting traction in its Generative AI journey. The big reason for such acquisitions would be to acquire the talent of targeted LLM companies. Google has made over two hundred fifty acquisitions since its inception, so it is safe to assume that it will continue this pace with a likely focus on Generative AI. Similarly, Oracle and Cisco have been very acquisitive in the last two decades. In fact, Larry Ellison once famously said that Oracle’s growth strategy is via acquisitions.
On the contrary, other tech corporations may not enter the Generative AI M&A race. Apple is sitting on a pile load of cash ($122.6 Billion in current assets, out of which $62.4 Billion in cash, as of June 30, 2023) but does not have a strong acquisitive culture. A horizontal platform company like Nvidia has invested in several Generative AI startups. Nvidia’s goal is to have more LLMs optimized for Nvidia GPUs, so it is unlikely that it will bring an LLM company under its belt. Nvidia CEO Jensen Huang has positioned Nvidia as an AI platform that spans horizontally across all industry sectors. Similarly, Amazon Web Services may want to remain agnostic to all the LLM providers.
An interesting corporation to look at is IBM which had pitched Watson AI as the future face of the entire company. But since the failure of Watson, IBM has been left behind in the AI world. Hence, IBM may look at making a major acquisition to catch up in AI.
Beyond the big tech sector, I feel that content generation and customer service sectors are two low-hanging fruits for Generative AI to conquer. Hence, we can expect big moves by entrenched companies in these sectors, eg, film-making media houses. Traditionally, non-technology companies join the bandwagon in the second wave, so I predict that they will take time before deciding to acquire a startup in a deep tech sector like Generative AI. The same is going to the case with Fortune 100 non-technology companies as well.
Summary
The hockey stick effect has begun in the Generative AI sector. The promise of future value creation is humongous. Generative AI can impact every aspect of a corporation – from product development to customer lead generation. Hence, there has been an acquisition spree in this sector. While it’s hard to predict which acquisitions will happen next, the market frenzy has begun. I may not be able to pinpoint who will acquire who, but we will likely see an increased M&A activity driven by the Generative AI bullet train.
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