Reports emerged recently that Alphabet (GOOGL -3.05%) (GOOG -2.97%), the parent company of Google, has consulted investment bankers and was weighing a bid to acquire HubSpot (HUBS 1.13%), a pioneer in inbound marketing and a rising star in the field of customer relationship management (CRM). The rumor, which was first reported by Reuters, set off a firestorm of views and opinions in the financial media.
While the deal makes sense on some levels, there could be hurdles to overcome if it is to come to fruition. Let's take a brief look at HubSpot's business and whether such a deal makes sense.
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A rising star in CRM
HubSpot was founded in 2006 with the idea that shoppers didn't want to be bombarded by digital ads but rather wanted useful information upon which to make an informed choice.
The company pioneered the concept of "inbound marketing," which seeks to attract potential sales leads by creating helpful content in the form of social media posts, instructional videos, blog posts, and infographics designed to inform potential customers and attract them to the services a business has to offer.
After becoming wildly successful with its original mandate, HubSpot sought to expand its offerings and now provides a full suite of CRM tools, focusing on the needs of small and medium-size businesses looking to scale up.
The company provides an AI-powered platform that provides "hubs" for marketing, sales, customer service, content management, operations, and commerce. Each hub acts independently but is also deeply integrated with HubSpot's other offerings, including unified customer data, customization, and customer intelligence.
Offering an integrated platform eliminates the usual hodgepodge of solutions small businesses typically endure.
Why such a deal would make sense
Alphabet's Google is the world's largest digital advertiser, so bringing an inbound marketing specialist into the fold might make sense. The company could use HubSpot's tools as another way to attract customers to Google's advertising platform, even those that might ordinarily look elsewhere. Furthermore, the combination would offer a unique alternative, providing digital advertising, inbound marketing, and CRM solutions.
Providing HubSpot's services via Google Cloud would have intriguing potential. Not only would it represent a captive audience for HubSpot's CRM services, but it could also potentially act as a catalyst to drive growth for the company's cloud infrastructure service.
Furthermore, HubSpot's recurring sales would be attractive to Alphabet. The CRM expert generated more than $2 billion in subscription revenue in 2023, an increase of 26%. To be clear, that's a drop in the bucket compared to Alphabet's revenue of $307 billion last year, so it certainly wouldn't move the needle.
Lastly, Alphabet could certainly afford the deal. It has roughly $111 billion in cash and equivalents on its balance sheet and will likely add more with each passing quarter -- particularly as the advertising market recovers from its slump.
Why such a deal wouldn't make sense
The biggest question on everyone's mind considering the likelihood of such a deal is whether the acquisition could withstand regulatory scrutiny. Numerous analysts have weighed in, and the verdict is mixed.
KeyBanc analyst Jackson Ader suggests that even though regulators have been looking much more closely at acquisitions by large-cap technology companies, he suspects that HubSpot's software-as-a-service (SaaS) model is far enough removed from Google's other core businesses that it would pass regulatory muster.
On the other hand, Oppenheimer analyst Ken Wong believes the deal is dead on arrival and that Alphabet's potential acquisition of HubSpot is a "highly unlikely outcome." He also suggests that the combination would raise antitrust concerns and attract a higher degree of regulatory scrutiny. And he isn't the only one who thinks so.
Then there's the matter of the price tag. At the time this rumor was reported, HubSpot had a market cap of $31.76 billion, not including any premium that investors would certainly demand in order to approve such an acquisition.
While the amount of the upcharge varies, the average acquisition premium paid for a company is 30%, according to a study by the accounting firm Deloitte. Tacking on a 30% premium could boost the cost for HubSpot to more than $41 billion -- a hefty price tag for any company -- and it would be Alphabet's largest acquisition ever.
The final analysis
There is certainly a lot to consider, though I'm sure Alphabet has done its homework -- particularly in terms of valuation.
HubSpot generated revenue of $2.17 billion in 2023, an increase of 25%. Wall Street expects the company to generate revenue of $2.56 billion and $3.04 billion in 2024 and 2025, respectively. That works out to a forward price-to-sales ratio of about 15, a somewhat lofty multiple.
If Alphabet is truly considering buying HubSpot (and that's a big if), it must believe that it can wring much more revenue out of the company's CMS suite of tools. Given that Alphabet has the world's third-largest cloud infrastructure service, it would have a built-in target market.
Investors should keep their eyes on the headlines to see if Alphabet really is interested in buying HubSpot. If it is, the company will likely pay a hefty premium. As a HubSpot shareholder, I hope this turns out to be rumor and speculation. I believe it has a long and profitable road ahead, and shareholders have more to gain if it travels that road alone.
