After years of avoiding large-scale mergers and acquisitions, ServiceNow has suddenly embarked on an acquisition spree this year, spending at least $12 billion on acquisitions or strategic investments.
On Tuesday, ServiceNow announced its largest-ever acquisition, agreeing to purchase cybersecurity startup Armis for $7.75 billion.
This transaction follows the company's recent $2.8 billion acquisition of Moveworks just one week prior, and a $750 million investment in contact center software provider Genesys several months earlier.
This series of moves has raised investor concerns that the company may be starting to rely on deals to stimulate growth, particularly considering CEO Bill McDermott's history of presiding over a series of controversial acquisitions during his tenure at SAP SE.
Before news of the Armis deal first emerged on December 13, ServiceNow's stock had already fallen 18% this year, and it has declined an additional 12% since then. RBC Capital Markets analyst Matthew Hedberg noted that Wall Street is displeased with the possibility that the company might use acquisitions to boost slowing revenue growth.
The transaction size has reached a record high.
Armis specializes in identifying and tracking security threats to enterprise devices, strategically complementing the enterprise IT operations management software sold by ServiceNow. This $7.75 billion deal represents ServiceNow's largest transaction to date.
In addition to the three major transactions with disclosed prices, ServiceNow has completed six other acquisitions this year where prices were not disclosed. According to media reports, the company's total expenditure on acquisitions and investments for the full year has exceeded $12 billion.
These deals remind the market of McDermott's acquisition strategy during his time at SAP. In 2018, he told CNBC that SAP would not pursue large acquisitions, but announced the $8 billion acquisition of Qualtrics just months later.
The recurrence of a similar script at ServiceNow has sparked investor questions about the sustainability of its growth. Guggenheim analyst John DiFucci wrote that as McDermott embarks on large-scale deals again, it feels somewhat like "déjà vu." He stated:
This acquisition frenzy appears more like management attempting to fix slowing revenue growth through M&A rather than a product enhancement strategy.
The company faces growth pressure.
ServiceNow has successfully maintained rapid revenue expansion in recent years, even as many competitors experienced slowdowns.
The company expects to generate over $13 billion in sales this year, representing 21% growth compared to last year, roughly in line with the 2024 revenue growth rate. However, Wall Street analysts anticipate that sales growth will fall below 20% in 2026, excluding the impact of acquisitions.
When McDermott took the helm at ServiceNow in 2019, many expected him to be aggressive in M&A. However, he had attempted to indicate those days were behind him. McDermott stated in early 2023:
Organic growth is delightful, and we will stick to this path.
Just this month, company executives also indicated they would focus on "tuck-in" acquisitions—smaller deals that don't require significant integration work.
Addressing investor concerns, a ServiceNow spokesperson stated in a declaration that comparing McDermott's M&A track record at SAP is "comparing apples to oranges." The spokesperson pointed out:
In the 2010s, the industry was racing to build scalable software-as-a-service businesses in the cloud. Particularly for large, established enterprises, M&A was a necessary tool in that environment, which is why many companies actively pursued it.
The spokesperson added:
Compared to SAP in the 2010s, ServiceNow is in a fundamentally different and better strategic position. ServiceNow does not need to buy market appeal or growth through acquisitions. The company's strategy remains fundamentally unchanged.
Comments