If you're following the tech space, you likely know that Google (GOOG +1.71%) announced on Monday that it's acquiring Nest Labs, which makes "smart thermostats" and "smart smoke and carbon monoxide detectors." The $3.2 billion all-cash deal makes it the second-largest acquisition in Google's history, behind only its $12.5 billion acquisition of Motorola.
Pricey deal? Nope, it's a bargain
There's been the usual buzz from some corners that this is a pricey deal based on Nest's revenue -- or best guesstimates of revenue, as sales figures weren't released.
First, let's put $3.2 billion in context. Google had $54.7 billion in cash on its balance sheet, as of the most recent quarter, and has generated a levered free cash flow of $7.5 billion over the trailing-12-month period. So, we're talking about just 5.9% of its available cash, and at the rate that Google throws off greenbacks, this cash-machine should recoup its investment in less than six months.
Second, this acquisition is more about information and building an ecosystem, than just about generating revenue from pretty gadgets. The aesthetically pleasing home devices provide Google with an ideal entree into consumers' homes, so Google can do what it does best: collect data. The more extensive and better quality data the big G collects on users, the more valuable is its primary product: advertising. Additionally, once Google gets a further foothold in consumers' lives, the switching costs -- the money and hassle involved in moving from one provider or ecosystem to another for any service -- gets upped.
Google's getting its Apple on as it takes on Honeywell
Nest co-founder and CEO Tony Fadell is a former Apple exec widely considered to be the man behind the iconic iPod design. Not only does Google's buy bring Fadell on board the Android machine, but it also brings several other former Apple execs over to Google.
Not surprisingly, Nest's products -- which are controlled wirelessly via a mobile device, such as a smartphone or tablet -- are easy on the eye with a streamlined design and sport an intuitive user interface. Here's a look at the Nest Learning Thermostat, the company's flagship product introduced in 2011, and the Nest Protect, launched last year:
Source: Amazon.
Sleek, huh? The features of these products apparently resonate with many. The second-generation of the Learning Thermostat is the best-seller on Amazon in the home programmable thermostat category. The brainy device, priced at $249, sports a 4-star (out of 5) rating, based on input from nearly 2,000 customers. Honeywell's (HON +1.80%) high-end offering, which sells for $185, takes the No. 2 spot, in a category in which Honeywell reigns.
The thermostat's smart sibling, the Nest Protect smoke/carbon monoxide detector, has notched a 3-1/2-star rating on Amazon. The product, priced at $129, comes in both battery-operated and 129-volt wired versions.
Have you ever batted a smoke detector in an attempt to hit the "off" button when it decided to go to town after getting a whiff of smoke coming from something cooking? The Nest Protection will put an end to that inconvenience, as you can hush it by using a waving motion while standing under the device. It's packed with a host of other nifty features meant to limit inconveniences, as well as improve safety. The Learning Thermostat, likewise, sports many handy mobile device-controlled features to help consumers save money and enhance their comfort.
Google's entrance into the home automation space has to be viewed as somewhat of a threat to Honeywell, a leader in the broader "building automation" category. While Honeywell is well diversified, as it has four segments, its automation and control segment is its largest segment, accounting for nearly 43% of its revenue in its most recent quarter.
This division is also involved in some heavy-duty commercial and industrial business, and I can't see Google entering the non-consumer space. Nonetheless, home automation is widely viewed as a potentially huge market in the not-too-distant future, so Honeywell can't be thrilled about Google entering the space in which it was an early mover. Cash can certainly be king when it comes to entering -- with the goal of dominating -- a new market. Google's cash hoard makes Honeywell's solid cash position -- $6.15 billion as of the most recent quarter -- look like chump change.
That said, Google's entrance into the market could, at least initially, benefit Honeywell and the other players, as it's increasing focus on home automation, which could ramp up the adoption rate for smart home products.
Google's Nest acquisition appears to be its initial step as it takes on Honeywell and others in the battle to win the "smart house." This is one battle on Google's march toward its goal of being a major player in the Internet of Things. Google's well on its way in the other battles -- the battle to win the car and the battle to win the person via its wearable tech (Google Glass) offering.
Foolish final thoughts
Google's Nest acquisition should be good for shareholders, as its attractive, convenience-feature-packed products seem an ideal way for Google to start nesting in consumers' homes.
Google's master plan appears to be adding one more thing consumers can do, or control, with their mobile device, and then another, and another... until, finally, your mobile device (Android-powered, Google hopes) becomes the remote control to your life. All these diverse things will be seamlessly connected to the Internet and each other, providing you with instant feedback and, hopefully, make your life easier. This, in a nutshell, is what is meant by "The Internet of Things," and it's going to be here sooner than many believe.
