The five big tech companies are worth almost $3 trillion, so they must pursue huge deals to keep growing

Key Points
  • The world's five most valuable companies are all in technology.
  • To move the needle, they need to find "transformational" deals.
  • Prior to Whole Foods, Amazon had never spent more than $1 billion in an acquisition. founder and CEO Jeff Bezos.
K.Asif | India Today Group | Getty Images

The big five technology companies have so much market value — $2.85 trillion — that analysts and investors are constantly asking how they're going to spend it.

Increasingly, the answer is they're going to buy into new markets.

"Over the last five years, a lot of tech companies decided we need to be doing transformational stuff that gets us into new categories where we don't have a skill set or user base," said Jeff Richards, a partner at Silicon Valley venture firm GGV Capital. "The old low-risk, small acquisition, build it up over time method doesn't work."

Media conglomerates, automakers, airlines, real estate companies and even lenders are all on the table as the tech leaders gear up to be a larger part of the overall economy.

Deals by tech giants in past 5 years

Target Price Acquirer Year
LinkedIn$26.2 blnMicrosoft2016
WhatsApp$19 blnFacebook2014
Whole Foods$13.7 blnAmazon2017
Motorola$12.5 blnGoogle2012
Nokia$7.2 blnMicrosoft2014
Nest$3.2 blnGoogle2014
Beats$3 blnApple2015
Mojang$2.5 blnMicrosoft2014
Oculus$2 blnFacebook2014

Amazon's announced $13.7 billion acquisition of Whole Foods on Friday is the company's first deal ever for more than $1 billion and gives the internet giant a network of more than 450 physical stores.

Microsoft spent almost twice that amount last year, buying LinkedIn for $26 billion, by far its largest deal ever. Until then, Microsoft was virtually nonexistent in social networking or professional recruiting software.

Google's priciest purchase was Motorola, which cost $12.5 billion in 2012, followed by digital thermostat maker Nest for $3.2 billion two years later. That's the leader in internet advertising spending close to $16 billion on hardware companies.

Apple, like Amazon, isn't known for opening its wallet, and the one time it did in a big way was in 2014 for headphones maker Beats, which cost $3 billion. That was at least in part a talent acquisition, as Beats co-founder and music industry veteran Jimmy Iovine now runs Apple Music, which is a critical part of the company's goal of doubling its services revenue by 2010. (In the quarter that ended in December, Apple booked more than $7 billion in services revenue.)

For Facebook, the $19 billion WhatsApp acquisition was shocking at the time for its price tag, though messaging as a product isn't too far removed from social networking. However, the $2 billion purchase of virtual reality company Oculus later that year was quite far afield.

This college dropout grew Whole Foods into the company Amazon is buying for $13.7 billion

Not a great track record

Big and bold acquisitions are risky though. AOL-Time Warner was the biggest bust in the history of the tech industry, and don't forget Hewlett-Packard's disastrous $25 billion purchase of Compaq. Microsoft ended up writing off the entirety of its $7.2 billion purchase of Nokia and even Google ended up splitting apart Motorola and selling it off, holding onto just the patents.

But there's no equivalent playbook for Amazon's purchase of Whole Foods, a 450-store grocery chain with 91,000 employees. For one, no other tech company could get away with spending that kind of money on a retailer with a 4.6 percent operating margin. But at Amazon, which has run at or near breakeven for most of its history, that represents margin expansion.

The market is giving Jeff Bezos the benefit of the doubt. Analysts are overwhelmingly bullish on the Whole Foods deal as are investors, who sent Amazon shares up 2.4 percent on Friday to $987.71, tacking on $11.3 billion in market value.

"Amazon's rise to dominance in other categories has been marked by directly disrupting traditional brick-and-mortar retail categories," wrote Michael Graham, an analyst at Canaccord Genuity who recommends buying Amazon shares. "With the WFM acquisition, it jump-starts the attack on one of the least penetrated categories — groceries."

Perhaps none of Amazon's peers could get away with spending billions of dollars on a grocery store chain, but as they look to put their market cap and balance sheet to work, the tech leaders will keep looking well beyond their own backyard.

Correction: This story was revised to correct when Apple booked more than $7 billion in services revenue. It was in the quarter that ended last December.