I don’t have revenue breakdown on AWS orgs to back this up but I suspect CloudFormation isn’t one of the money printing products so it’s hard to justify investments as large as acquiring Hashicorp.

This is despite the obvious role of CloudFormation as a productivity multiplier inside the AWS world

That’s an interesting point, but Hashicorp does a fair bit more than just Terraform.

Why? Hashicorp provides them with tooling at no extra cost. Majority of that is free to the end user. Having Hashicorp separate is great for the cloud providers, since they don't have to manage or spend money on Terraform... but still can contribute the code.

Because they could focus extra resources on making the Terraform providers for their own products really good. They could have really tight, quick communication channels between the teams building their features and the Terraform team. Much harder to do when you're in separate companies.

Of course, AWS could be doing the same for Cloudwatch, but apparently they're not bothered.