Nvidia's Strategic M&A
In this article, we will look into the tech titan that has taken the world by storm – Nvidia.
From powering groundbreaking AI to enabling self-driving cars, Nvidia's processors have become the driving force behind some of the most cutting-edge innovations of our time. This graphics chip maker has transformed itself into an AI juggernaut, with its GPUs being the processors of choice for training neural networks and running complex AI workloads.
But Nvidia's ambitions extend far beyond just hardware. The company's goal is to build and support an AI ecosystem. To this end, Nvidia has already secured an extensive partnership network spanning technology, automotive, healthcare, industrial, and entertainment sectors.
But did you know that Nvidia has been increasing its strategic investments over the years as well?
Let's first take a look at Nvidia's investment activities in the last five years. We see that Nvidia has been increasing the number of investments year over year. If we take a closer look at the more recent deals, we notice that most investments are participation in fundraising rounds concentrated in four broad areas: AI applications, computing, robotics, and healthcare.
From these investments, what can we learn about Nvidia's M&A strategy? How are they planning for their next development? Let's analyze it using the STAR deal evaluation framework: Strategic Fit, Transaction Structure, Actionability, and Return.
Strategic Fit
Nvidia is already the world's leading GPU company with a global sales network. It's clear they don't need M&A to increase market share or expand geographical presence.
Instead, M&A is a key tool for Nvidia to continue acquiring new complementary capabilities. In fact, in Nvidia's latest company presentation, they stated they're making strategic investments to grow talent and build up their platform reach & ecosystem.
Starting from its core data center-related business, we see Nvidia has historically invested in cloud-related companies. In November 2023, Nvidia invested in the cloud data analytics company Data bricks. Back in 2020 and 2022, Nvidia has also made control acquisitions of companies with various cloud storage and network capabilities, such as Mellanox, Cumulus Networks, SwiftStack, and Excelero.
On top of in-house R&D, Nvidia leverages M&A to combine the top talents and technologies on the market to create best-in-class data center solutions.
To further build out Nvidia's platform and ecosystem, Nvidia has also been relentlessly making minority investments in its customers focusing on applications of Nvidia products.
This covers a wide range of areas, from AI software and robotics to healthcare and automotive sectors.
For example, we've seen Nvidia invest in AI writing and research assistant tool Essential AI Labs, industrial automation robotics company Figure AI, generative biotech researcher Superluminal Medicines, and automotive verification solution provider Foretellix.
Instead of building out all these capabilities in-house, through minority investments, Nvidia can learn about their customers' needs and continue investing in R&D to stay at the forefront of technology.
Transaction Structure
Starting from a few years ago, Nvidia has been increasing the number of its minority transactions.
The area of AI application is broad, and thus the number of reach becomes more important than revenue consolidation. With minority investments, Nvidia can enjoy being at the center of the ecosystem and avoid potential regulatory challenges like those faced in the ARM transaction, which we will elaborate more in the next section.
In addition, it's worth mentioning that Nvidia also utilizes business partnerships to strengthen its ecosystem. Notable partners include the familiar Google, Microsoft, Oracle, Hitachi, Amgen, and the list goes on.
While it may not be easy for Nvidia to do a transformational deal now, it did make a couple of smaller control acquisitions. Notably, in 2023, Nvidia acquired OmniML, a startup that compresses AI models so that computing can be run on edge devices.
We all know that the present-day AI training requires such high computing power that it can only be run on the cloud. But for AI to be more prevalent, it will eventually need to operate on edge devices, such as cars, robots, mobile devices, and smart cameras.
Therefore, to stay ahead of competition, it would make sense for Nvidia to fully takeover companies that has leading application and significant potential in this edge computing space.
Actionability
When evaluating potential investments in downstream customers, why did Nvidia adopt the minority investment approach?
To start with, Nvidia actually does not have any intention of controlling these companies and instead, would like to build deeper relationships through capital alliances.
Additionally, considering that many start-up companies are still at pre-profit stages, they would constantly need additional fundraising to sustain business operations.
Therefore, these deals are not only actionable but also win-win situations for both Nvidia and the investee companies.
In 2020, Nvidia signed a $40 billion agreement with SoftBank to acquire ARM, hoping to drive innovation by combining Nvidia's leadership in AI with ARM's vast computing ecosystem.
However, the deal was ultimately not actionable. The global chip shortage following COVID led to scrutiny by antitrust authorities worldwide, including the U.S., U.K., and the European Union.
As a result, Nvidia and SoftBank announced the termination of the deal in February 2022.
Return
These days, when Nvidia considers M&A opportunities, they're likely not thinking about how these target companies will contribute directly to their consolidated revenue growth or margin improvement.
Instead, by recruiting more companies to use its platform, Nvidia can build an ecosystem that is strong and sustainable.
Coupled with the outstanding performance of its GPU architecture, Nvidia has made its products almost irreplaceable in today's AI revolution.
This allows Nvidia to continue charging premium prices with the growing demand for its products, and as a result, earn an outsized margin. For the fiscal year ending January 2024, Nvidia's gross margin achieved a stellar 74%.
By using the STAR deal evaluation framework, we can quickly understand how Nvidia is leveraging M&A to complement their business development and company growth.
How are you designing the M&A strategy for your company? Perhaps, it would be most effective to leverage the experience of seasoned M&A practitioners so that you can avoid costly mistakes and achieve your goals sooner.
Find out more about our on-demand online course "How to Successfully Navigate Your Next M&A Deal".
Follow
Subscribe to our Newsletter
For the latest M&A tips, case studies, and deal commentaries.
No spam. Unsubscribe anytime.
Follow us:
© EnHouse M&A. All rights reserved.