To kick off the new year, the tech world got a big jolt — that is, Google (GOOG) announced a $3.2 billion for Nest, which is the developer of the highly popular Internet-connected thermostat.
This is definitely a critical transaction, ranking No. 3 for all of t company’s deals (behind the Motorola Mobility and DoubleClick acquisitions). And yes, the impact could be huge. “If you think about it,” said Marcus Nelson, who is the founder & CEO of Addvocate, “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.”
OK, so what are some of the ways Google will benefit from the Nest deal? Let’s take a look:
Get Tony Fadell
He is the co-founder of Nest and is probably a big reason for the outsized price of the acquisition. Keep in mind that he was the mastermind of Apple’s (AAPL) hugely successful iPod (called the “father of the iPod”) as well as the initial development of the iPhone.
In other words, Fadell has a kind of Steve Jobs genius when it comes to reimagining prducts. And how better an example of this then by doing it with something so ordinary as a thermostat?
According to a blog post from one of Nest’s investors: “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. “
Curing the Hardware Problem
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. It even looks like Glass is not getting much traction either.
So with Nest, 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 M&A for hardware-type companies lately, such as for those that focus on robotics, gesture recognition and computer vision.
At the same, Google has also been focusing on internal development for initiative like dirveless cars, laptops and tv devices.
At $50 billion in revenues, it is getting tougher for Google to keep up the growth ramp. This means the company has little choice but to expand into new categories. No doubt, the home automation market has huge potential — and could certainly benefit from advanced technologies.
By getting Nest, Google will get a management team that understands this market and how to attack it. For example, the company has extensive relationships with utility companies and also has a team of over 25,000 certified installers.
Nest will also operate as an independent company. For the most part, it’s brand stands for slick design and cutting-edge technology, which will be key for getting uptate 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 and Apple move in.
Tech acquisitions can be extremely tough to pull off. But Google has been able to find ways to make deals work. Just look at what the company has done with YouTube and Android.
In other words, Google has the resources, infrastructure and know-how to scale a product or service. It’s one of the core competencies that few tech giants have.
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 deal will certainly provide even more valuable data. “Today, technology revolves around data, an area Google is a master at,” said Vineet Jain, who is the co-founder and CEO of Egnyte. “The acquisition foretells their intentions to own devices that will help them build a rich data profile for as many people in as many households as possible.”
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.