This article is third in a series of interviews with the heads of M&A at the most acquisitive companies in the tech industry. Previously we’ve spoken with dealmakers at Salesforce and Google. The following has been lightly edited for length and clarity.
Peggy Johnson, EVP of business development at Microsoft, has been doing deals at the conglomerate since 2014, when she joined following a 24 year-run at Qualcomm. We spoke about autonomous vehicles, artificial intelligence, and consolidation in the enterprise technology category.
Fortune: Do you expect to this year’s pace of M&A to be similar to last year’s, which I think was around 10 deals?
Peggy Johnson: We did 10 and the year before we did 17. Deals are always a bit lumpy. We look at: Is it solving a problem for us? And if it does, we move to acquisition. I started in September 2014 and we have announced 33 acquisitions in that time. Some years more, and some less, but definitely a steady pace for sure.
They’re not all unicorns—LinkedIn was an exception. Many of them are relatively small companies that show some promise and fill a gap we have. We think of it as “land and expand.” We do something interesting in one area that we’d like to propagate into other areas.
One example of that is MileIQ [the mileage tracking app that Microsoft acquired in 2015]. Not only did [CEO Chuck Dietrick] bring a very interesting business model with the expense reporting of airline miles, he brought a great outside view. And we really enjoyed his perspective. We’ve learned so much form them and all of our CEOs we have brought in. Largely we have let them continue to run as they have done and try not to disrupt the magic they bring to us. We have a great set of founders in our San Francisco office. That has been a good network for other companies in their networks.
Under CEO Satya Nadella, Microsoft M&A has increased significantly. What’s your specific mandate from him and do you know whether it’s working?
M&A at Microsoft is a team sport for the senior leadership group. They’re all involved in it and we all play different roles. My role is the first centralized business development role at Microsoft. The team previously had been embedded in the product groups and Satya pulled them out. Now we can sit across all the major groups of the companies and we have much more flexibility. We gave them the ability to look across the company to draw upon assets wherever they may be. Business development is a part of M&A – we identify signals in the market, whether its trends or disruptive technology, and bring them back and address the opportunities. I have three levers I can pull – partnerships, acquisitions, or investments.
What are some of the signals you’re excited about?
Clearly AI, machine learning. Anything going on in business and cloud infrastructure space. Productivity trends could be an interesting way to reach small and medium-sized businesses, which was what MileIQ was — a really slick way to track mileage expenses.
We bring that signal back and then propagate it across the senior leadership team and product leaders. Many times we have relied on product leaders to surface some of these things. Without a programmatic group in place like mine, that is very outwardly focused, we’ve missed things in the past. We wanted to make sure we have eyes and ears all across the industry, even if it was a weak signal.
What has Microsoft has missed in the past?
There are probably any number of areas we could debate. We were late to the mobile market for sure.
One area that we are super-focused on that I mentioned was AI. A really interesting story around our acquisition of Maluuba [in January]: They are Montreal-based, doing machine reading comprehension. When we met with them at one of those demo days, they blew us away with their tech and talent.
We brought that signal back. It started as a possible Microsoft Ventures investment, and after doing more diligence on the team and technology, we decided to pull the other lever of acquisition.They’re based in Montreal, and in parallel we were able to build a base in Montreal.
On top of that, we started a separate fund focused on funding startup companies who are utilizing AI for good [in 2016]. We’re looking at solving some of the big issues society faces, whether its funding solutions to diseases or climate change. The first investment out of that fund was another Montreal company. There’s a lot of activity in Montreal right now and we want to be there, rather than having everyone move here.
There’s a lot of hype around AI. How do you sort through the noise to find what’s real?
We have to take care that we don’t fall into the hype cycle ourselves. As a company, we have been working with AI for 25 years, if you go all the way back to when Bill Gates launched Microsoft Research on the campus here, we have had teams working on AI. Bill used to say, “Someday computers will be able to see and hear and communicate and understand us.” We’re entering that last phase – the “understand us” phase. That’s an area of focus for us.
Do you view AI as an actual product to sell, or something that you infuse into your existing products?
More the latter [for now]. We hope to take our customers through their own digital transformation. I don’t know if there’s a standalone service, but it’ll be a suite of services. This is just the beginning. It’ll be getting bigger. That group in Microsoft Research that’s focused on AI has 5,000 people. That will be a great muscle that will continue to build.
You mentioned filling gaps in Microsoft’s capabilities. Where do you see gaps?
Another area of focus is anything autonomous, whether it’s flying or driving or walking, like robot-type things that we think we can enable. Because we have a secure cloud offering and the ability to draw all our assets together, we think we can meet companies in the autonomous space wherever they are on the spectrum, from assisted to autonomous. That’s an area of focus. We announced a connected vehicle platform [in January]. It’s a set of cloud-based tools that manufacturers can use to create their own self-driving services, like productivity on the car, or their own self-driving mapping. You’ll see a set of products and services that the car companies want to realize that we can enable with our tools. The connected vehicle platform touches all areas of our company. Nissan is the first that has fully embraced the platform.
Autonomous is another area where valuations are becoming inflated. How much does that play into your justification for deals?
Valuations are always much-debated. I try to center on what is the value to us. Is it solving a problems for us? If it is, we find a way to proceed. If the valuation has been overhyped on something and it doesn’t make sense, we won’t. It’s very simple for me. I tend not to worry to much about the valuation. It’s really what the value is to us.
You’re also doing a lot of venture investing – 26 deals in the first year.
When I got here we didn’t have an early stage fund and I felt that, without one, we were missing early signal that might give us a view into a developing trend or interesting technology, and that puts us back in that conversation. We are at the table with the VC and startups and we have that ability to bring in these signals, and makes sure that senior leadership knows and sees what we see out there.
That can also create some uncomfortable situations. What happens when one of those investments becomes a competitor, or if you acquire a company that competes with a portfolio company?
I would rather be able to have my nose under the tent early on, so I can be more prepared if they turn into a competitor or prepared to partner with them. Sometimes these things turn into acquisitions, as Maluuba did. I’d rather know about them when they are a $5 million or $50 million valuation, not a $500 million or $5 billion valuation. Sometimes it behooves me in this role to have that vision earlier rather than later.
We have to balance strategic opportunities versus ROI. We ask the team to show us the path to commercialization and path to ROI. We are very disciplined and rigorous in our approach, and super focused on monitoring the investment. We do it all within my team – we don’t rely on the product groups to track the investments.
Now that so many enterprise companies are preparing to go public, are you monitoring the IPO pipeline for deal opportunities?
I’d rather know about them much earlier. That’s the gap that MS Ventures builds for us. We can look at things much earlier and have that ability to be flexible. I don’t want the market to drive when I’m making an acquisition.
I get the sense that your industry is poised for some major consolidation. There’s the expected tax repatriation, and many of the biggest players are looking to M&A for growth. Do foresee consolidation?
I’m very disciplined about what problems does a company solve for me, whether I choose to partner or invest or acquire. I try not to get drawn into something if there’s a hub of activity and not have outside forces involved. That just brings emotion and drama into the picture. I’d rather just keep a very consistent and non-volatile view.
How would Microsoft react to its competitors merging?
We’re doing our homework. We’re in the mix and making sure we don’t miss things. But we generally aren’t surprised. We like to take a long term view and not be reactionary.
Are you seeking transformative deals?
We’re looking at broadly across the spectrum of things. If it solves something for me, it could be a little tiny company and it could be something like LinkedIn, that brought us this fantastic enterprise network. But we don’t think of it as transformative or not.
Does the possibility of looser antitrust rules and repatriation under President Trump affect strategy and repatriation?
[Comment provided by Microsoft’s communications team]: We are supportive, as we have been for years, of structural US tax reform. We will continue to watch the various proposals with interest.