What Will Google Buy Next? 12 Potential Targets
Why Ruckus Wireless, ST Microelectronics, Splunk, and Nuance Communications could all be on Google's shopping list.
With the Nasdaq Composite Index up just 0.2% for the year, and with tech stocks in double-digit declines in recent months, thoughts turn to the amusing parlor game of guessing who might get bought.
Of course, there's no guarantee any deals will get done in this environment. Many stocks may now be trading at bargain prices from the viewpoint of a rich acquirer, but that means they're also probably fetching far less than what the target company thinks it's worth. In any event, if you want to play the game, there's no better place to look for a cash-rich acquirer than Google (ticker: GOOGL).
Analysts estimate Google will generate $17.5 billion in free cash flow, boosting its already sizable $59 billion hoard this year. And the search giant is nothing if not acquisitive, doing 176 transactions in the past five years, including minority stakes and outright acquisitions, according to data from Bloomberg.
Past deals have been significant, including the November 2006 purchase of YouTube for $1.65 billion; the March 2008 purchase of ad network DoubleClick, for $3.1 billion; the May 2012 purchase of Motorola Mobility for $12.9 billion; and the acquisition, in February, of home automation start-up Nest Labs for $3.2 billion.
Google has even said it may need as much as $30 billion of its cash overseas to make acquisitions in coming years, Bloomberg's Brian Womack reported just last week, citing a regulatory filing.
Adding fuel to the fire, Google recently instituted a third class of stock, the so-called C shares, which have the same economic terms, but no voting rights, making it easier for Google to do stock-based deals without diluting control.
So what might Google buy next?
Consider the logic of Google's business. From a thousand-foot view, "Google is like the ultimate tax on the Internet," says Mark Mahaney, who follows the stock for RBC Capital Markets. Meaning, Google always finds ways to extract money from use of the Internet in its myriad forms, whether that is via Web searching on a traditional desktop computer or a phone running Google's Android software.
Android, which it gives away free, extends Google's ad sales to mobile. His point: If not directly, Google nevertheless eventually finds a way to extract a penny.
Looked at another way, Google's M&A follows the playbook set down by Leonard Kleinrock, a UCLA professor of computer science who was one of the founders of the Internet. In a 2003 article, Kleinrock wrote that while it has become pretty ubiquitous, there's still a need to make the 'Net even more pervasive, a kind of invisible digital nervous system linking everything and constantly enmeshed everywhere in our digital lives.
For Google, those are the magic words: The more the Internet is pervasive, the more it can collect in "taxes" for helping us use it on a daily basis. And so Google has gone after things that can make the Internet more present at every moment, like Nest, which promises to make your home and all the activity in it another point on its network.
Looking at the unfinished business of the Internet, as Kleinrock would describe it, there are still areas where Google could help extend connectivity. As I was writing this column, media reports claimed Google is working with Ruckus Wireless (RKUS), which has spent years putting Wi-Fi hotspots in metro areas to extend wireless Web access for phones and tablets. With a market value of $804 million, it could be snapped up by Google in the blink of an eye.
If not Ruckus, there are a number of Wi-Fi service providers that would also be small change, including iPass (IPAS), Boingo Wireless (WIFI), and Gogo (GOGO). With Comcast (CMCSA) talking about building out Wi-Fi networks as well, these companies could all be acquisition candidates if Google doesn't take them.
GOOGLE ALSO NEEDS TO CONSIDER wearables, says RBC's Mahaney. Naturally, since wearables promise to be the extension of the Internet into further corners of our lives. Closely held wearables makers Jawbone and Fitbit fit the bill. A more dramatic step for Google would be to buy one of the chip makers that are enabling semiconductors for wearable technology. That could include Europe's STMicroelectronics (STM), which has a market value of $8.5 billion, or smaller players such as $211 million QuickLogic (QUIK). NXP Semiconductors (NXPI) might be an excellent target to consider, but at $15 billion, it's a stretch.
Outside of the devices themselves, somebody has to help the world manage and understand the many millions of such wearable computers that will proliferate. Splunk (SPLK), which came public in 2012, is popular for its data-sifting software that helps companies analyze tons and tons of data, from online comments to video images. Morgan Stanley tech analyst Francois Meunier recently remarked to me that Splunk could end up being "the Google of the Internet of Things," referring to the collection of connected devices beyond traditional computers.
At $5.4 billion, Splunk would be a manageable deal, though closely held competitor Sumo Logic is also growing fast and could be an interesting alternative.
Another part of making the Internet ubiquitous is to make it operate behind the scenes in a transparent fashion, and speech-recognition technology is important in that regard. Despite Google's own progress with the technology, buying a prominent supplier like Nuance Communications (NUAN), at $5 billion, might have some appeal.
ONE OF THE BIGGEST CHALLENGES for Google is to make sure it keeps a hand in all Internet activity. There is always a danger it will lose out as that activity migrates away from basic search. Facebook (FB) poses a greater and greater threat to Google, in theory, as more and more activity disappears within its maws. But Facebook is too big to buy.
The other threat is Amazon.com (AMZN), whose transactions threaten the retail ad selling that Google does. For the moment, Google is doing fine just selling ads to Amazon, which Mahaney says is among the top 10 buyers of keywords on Google, along with eBay (EBAY).
The next big challenge for Google will be China. The company's service has been shut out of the largest Internet market. And that market contains a surging amount of retail activity in the hands of Chinese companies that Google can't legally buy, including social networker Tencent Holdings (2988.Hong Kong) and retail giant Alibaba Group Holding.
Will any of it happen? Your guess could be as good as mine, but it certainly is fun to speculate.