A fast-growing, break-even SaaS is often more valuable than a slow-growing, highly profitable one. Buyers, especially private equity, prioritize growth because it's the clearest path to achieving their 3-5x return target. They can optimize for profit later; restarting growth is significantly harder.

While public markets reacted negatively to ServiceNow's M&A activity, the strategy is a deliberate offensive move to lead in AI. By acquiring companies in high-growth areas like AI-powered cybersecurity, ServiceNow is expanding its market and solidifying its position as an "AI have" rather than signaling weakness.

Companies often announce and execute buybacks to appease the market, not because their stock is undervalued. This programmatic repurchasing, especially at cyclical peaks, destroys value. Truly value-accretive buybacks are rare because most managers lack the capital allocation skill to time them effectively.

Acquiring smaller companies at a 5-6x EBITDA multiple and integrating them to reach a larger scale allows you to sell the combined entity at a 10-12x multiple. This multiple expansion is a powerful, often overlooked financial driver of M&A strategies, creating value almost overnight.

The market fears that AI will instantly replace enterprise SaaS platforms are overblown. Companies like Salesforce and Adobe are deeply embedded in corporate workflows with massive switching costs. They are now trading at low multiples despite strong growth, presenting a significant investment opportunity.

Inspired by baseball's 'Wins Above Replacement' (WAR) metric, M&A should be evaluated not against doing nothing, but against a 'replacement-level' use of capital, such as a share buyback. A buyback is a readily available, low-risk alternative that most acquisitions fail to clear as a comparable benchmark.

The current M&A landscape is defined by a valuation disparity where smaller companies trade at a discount to larger ones. This creates a clear strategic incentive for large corporations to drive growth by acquiring smaller, more affordable competitors.

Recent acquisitions of slow-growth public SaaS companies are not just value grabs but turnaround plays. Acquirers believe these companies' distribution can be revitalized by injecting AI-native products, creating a path back to high growth and higher multiples.

Established software leaders should not try to innovate on all new AI technologies organically. A more effective strategy is to let the VC community fund early-stage bets, then use strong balance sheets to acquire the proven winners and integrate them into existing platforms, as Salesforce has done.