(Bloomberg/Brody Ford) — After years of eschewing big mergers, ServiceNow Inc. is on a deal spree. It has spent at least $12 billion this year on acquisitions or strategic investments.
The action has some investors on edge about whether the software company is starting to lean on deals to spur growth, particularly given Chief Executive Officer Bill McDermott’s history leading a series of controversial mergers during his tenure running SAP SE.
ServiceNow on Tuesday announced its largest-ever acquisition, an agreement to buy cybersecurity startup Armis for $7.75 billion. Armis, which specializes in identifying and tracking security threats on corporate devices, makes sense as a strategic fit for ServiceNow, which sells software to help corporations manage their information technology operations.
While ServiceNow has been integrating generative artificial intelligence features into its products, investors have been concerned about disruption to application software leaders from the emerging technology. The shares had declined 18% this year before news of the Armis deal first broke on Dec. 13, and have dropped another 12% since then. Wall Street isn’t happy that the acquisition may be used to boost slowing revenue growth, wrote Matthew Hedberg, an analyst at RBC Capital Markets.
The deal for Armis came a week after ServiceNow completed a $2.8 billion acquisition of Moveworks and a few months after a $750 million investment in contact center software provider Genesys. The company reached six additional deals throughout the year without price tags announced.
Before joining ServiceNow as CEO in 2019, McDermott engineered SAP’s largest deals ever — which weren’t always popular with Wall Street. He told CNBC in 2018 that big acquisitions weren’t on the horizon for SAP just months before announcing an $8 billion purchase of Qualtrics Inc.
It’s “comparing apples to oranges” to bring up McDermott’s M&A record at SAP, a ServiceNow spokesperson said in a statement. “In the 2010 time frame, there was a race to build scaled software-as-a-service businesses in the cloud. Especially for the large incumbents, M&A was a necessary tool in that environment, which is why so many companies pursued M&A aggressively.”
Still, when McDermott took over at ServiceNow, many expected him to make a splash with mergers and acquisitions. Instead, he has tried to signal that those days are behind him.
“Organic growth is delicious and we’re going to stay on that path,” McDermott said in early 2023. As recently as this month, the company’s executives have said the company is focused on “tuck in” acquisitions — meaning small deals that don’t require significant integration work.
With McDermott making big deals again, it feels like a bit of “deja vu,” wrote John DiFucci, an analyst at Guggenheim. “This buying spree looks more like a position of slowing top-line growth that management is trying to rehabilitate inorganically, vs. a savvy product tuck-in strategy.”
ServiceNow has managed to maintain rapid revenue expansion in recent years while many rivals experienced a slowdown. It’s projected to generate more than $13 billion in sales this year, a 21% jump from a year earlier. That would be about on par with its 2024 revenue growth, but Wall Street analysts expected sales — without the acquisitions — will rise less than 20% in 2026.
Compared with SAP in the 2010s, “ServiceNow is in a fundamentally different and better strategic position,” the spokesperson said. “ServiceNow doesn’t need M&A to buy market traction or growth.” The company’s strategy remains “fundamentally unchanged,” the spokesperson added.
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