Why Did Google Overpay For Its Second-Largest Acquisition?

Google buys Nest Labs -- and gets a head start on the "Internet of Things"

Jan 14, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The U.S. Congress has agreed a broad $1 trillion spending deal for the first time since 2009, heading off the possibility of another government shutdown. Coming on the back of a rough start to the week for stocks, that ought to give investors something to cheer about. The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) are up 0.43% and 0.26%, respectively, at 10:15 a.m. EST.

Google (NASDAQ:GOOGL) is a corporate iconoclast. What other explanation could there be for a $3.2 billion acquisition -- its second largest ever -- in an area that appears completely unrelated to its core activity? Furthermore, the price looks very rich indeed, which suggests that the search giant was well motivated to complete the deal.

The target? Nest Labs, which produces "smart" thermostats and smoke alarms for the home. For example, users can control the Nest Themostat from their mobile devices; in addition, it learns to recognize usage patterns and can change its own settings on that basis.

That sounds handy enough, but does it justify a multibillion-dollar buyout for a company that has not yet celebrated its fifth birthday? As FT Alphaville pointed out, under the most optimistic sales forecasts, Google is paying nearly 13 times revenue for Nest -- that's the high heat setting on the M&A thermostat. In a venture financing round early last year (in which Google Ventures participated), the company was valued at just $800 million.

Still, the company has an impressive pedigree: founders Tony Fadell and Matt Rogers are Apple (NASDAQ:AAPL) alumni; Fadell was a designer on the iPod and the iPhone, while Rogers was a hardware engineer on both products. Apple's object lesson that design is an important differentiator in consumer electronics was not lost on the pair: Nest's products cultivate a minimalist look that is reminiscent of Apple devices. iThermostat, anyone?

One can argue the price, but in the wake of last week's massive 2014 Consumer Electronics Show in Las Vegas, Google looks to have stolen a stride from some of its rivals and partners with this deal. Indeed, the so-called "Internet of Things," in which ordinary household appliances such as refrigerators and -- yes -- thermostats are accessible via the Internet, was arguably the emerging theme of this year's show. Samsung, for example, launched a "smart home" initiative to showcase the connectivity between its various devices and appliances.

What does this have to do with online search and advertizing, you might ask? Nothing, at first glance, although it could be a profitable sideline. However, I suspect the acquisition is more strategic than that. Nest may ultimately provide Google with more insight into how its customers live and spend their time -- which is another piece of the puzzle when it comes to building a consumer profile.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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