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Amazon says it's unlikely to go on a buying spree — but don't expect M&A rumors to cool down

  • There's been a frenzy of speculation around Amazon's acquisition strategy, after it acquired a number of big companies this year, such as Whole Foods.
  • But Amazon's management tells Citi Research that its M&A philosophy hasn't changed, and it remains focused on building rather than buying into a new market.
  • Still, there's reason to believe Amazon will eventually speed up its pace of acquisition.
Jeff Bezos
Shannon Stapleton | Reuters
Jeff Bezos

Amazon has made a number of major acquisitions this year, sparking a frenzy of speculation over what it would go after next.

Just this year, it made two blockbuster deals, with Whole Foods and Souq.com, and was rumored to be in the hunt for Slack and Shopify, each worth billions of dollars.

That's a huge change for Amazon, which is better known for building from the ground up rather than buying its way into new markets.

Amazon clearly wants those rumors to stop. After its earnings call Thursday, Amazon told Citi Research that there's no change in its M&A strategy.

"No — still very much build vs. buy. Those [acquisitions] had a lot to do with the quality of the particular companies and the ability to get a few years head start," Amazon's management said, referring to the Whole Foods and Souq.com deals, Citi Research wrote in a note Friday.

Still, there's good reason to believe Amazon will start scooping up more companies, as it grows and makes inroads into new markets.

For one, Amazon is sitting on a giant pile of cash. Currently, it has over $13 billion in cash and cash equivalents, more than double the amount it had in July 2014. The company has become a cash machine lately, generating $9.7 billion in free cash flow in the 12 months ending June 30, 2017 — a significant improvement from just three years ago when it had only $1.04 billion in trailing twelve months free cash flow. It wouldn't be too surprising to see the company put some of that money into play by making more acquisitions.

Perhaps the bigger reason Amazon will eventually need to speed up acquisitions is its software ambitions. Amazon has recently launched a new video conferencing app and call center software, with reports of a new productivity suite in the works as well.

Although it's possible to start organically, it's unprecedented in the long history of software that a company builds everything by itself. Even the most successful business software makers, such as Microsoft, Oracle and Salesforce, all go through buying cycles periodically. It's one reason why Amazon was rumored to have bid for Slack, and has been quietly acquiring a number of software companies such as Do.com, Graphiq and GameSparks.

As Amazon gets into new industries that deal with corporate customers, including online lending and supplier marketplaces, the need for a software acquisition could increase. For example, big companies use procurement software to buy their supplies, and Amazon may want to have its own procurement software for Amazon Business, its rapidly growing supplier marketplace.

For now, Amazon may not want to show any hints of spending more on acquisitions, especially given Wall Street's reaction to its earnings miss Thursday that brought its stock down 3 percent. But if it wants to get more serious about software, and make use of its growing pile of cash, it may eventually decide to spend more.