by Tom Taulli | January 14, 2014 11:44 am
The tech world started the new year with a bang, as Google (GOOG) announced some head-turning news in the mergers and acquisitions arena. Google paid $3.2 billion for Nest Labs, which is the developer of the highly popular Internet-connected Nest thermostat.
This is definitely a critical mergers and acquisitions announcement. In fact, the Nest Labs purchase ranks No. 3 for all Google buys, behind only the Motorola Mobility and DoubleClick acquisitions. And, of course, the impact of the Nest thermostat on Google could be huge.
“If you think about it,” Marcus Nelson, the founder and CEO of Addvocate said, “Google is working to become the nerve center of the world around us — a world that we will be able to control to make our lives a lot better, and make Google even richer.”
But while that’s accurate, it’s also a bit vague. Let’s take a closer look at some specific ways Google will benefit from the Nest Lab acquisition.
Tony Fadell is the co-founder of Nest Labs and is probably a big reason for the outsized price of the acquisition. See, Fadell was the mastermind of Apple’s (AAPL) hugely successful iPod (he is often called the “father of the iPod”) as well as part of the initial development of the Apple iPhone.
In other words, Fadell has a kind of Steve Jobs genius when it comes to re-imagining products. And the Nest thermostat might just be the clearest example of this.
According to a blog post from an investor in Nest Labs, “Tony’s success throughout his career … has been his uncanny ability to make software and hardware meld together as one to create a sublime user experience.”
That’s definitely a skill that Google can use.
When it comes to software design and infrastructure, Google is one of the world’s best operators. But when it comes to hardware, the company is a laggard. Just look at the lackluster results from the Motorola deal. And it looks like Google Glass is not getting much traction either.
With the purchase of Nest Labs, Google gets a much-needed boost of hardware DNA.
But this is also just one piece of the dealmaking. As you can see with this chart, Google has been aggressive with mergers and acquisitions for hardware-type companies lately, including those that focus on robotics, gesture recognition and computer vision.
At the same, Google has also been focusing on internal development for initiative like driverless cars, laptops and television devices. A gadget like the Nest thermostat just pushes Google even further in that direction.
With $50 billion in revenues, it is getting tougher for Google to keep up its growth ramp. This means the company has little choice but to expand into new categories and grow via mergers and acquisitions. No doubt, the home automation market — which the Nest thermostat is a leader in — has huge potential.
By snatching up Nest Labs, Google will get a management team that understands this market and how to attack it. For example, Nest has extensive relationships with utility companies and also has a team of over 25,000 certified installers.
Plus, Nest Labs will operate as an independent company. For the most part, its brand stands for slick design and cutting-edge technology, which will be key for getting uptake with consumers. Let’s face it, the home automation market is likely to get more and more crowded as tech giants like Microsoft (MSFT), Samsung (SSNLF)and Apple (AAPL) move in.
Oh, and while tech acquisitions can be extremely tough to pull off, Google has been able to find ways to make deals work. Just look at what the company has done with YouTube and Android.
With data, Google has built one of the world’s most valuable companies. It has allowed the company to understand how people really behave, which has made it much easier to create more useful products.
But the Nest Labs deal will certainly provide even more valuable data. “Today, technology revolves around data, an area Google is a master at,” said Vineet Jain, the co-founder and CEO of Egnyte.
“This acquisition foretells its intentions to own devices that will help Google build a rich data profile for as many people in as many households as possible,” he added.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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