Alphabet Inc (GOOGL): A Crazy M&A Idea That Could Pay Dividends

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GOOGL - Alphabet Inc (GOOGL): A Crazy M&A Idea That Could Pay Dividends

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Ok, don’t laugh, but I think the idea of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) buying Whirlpool Corporation (NYSE:WHR) isn’t nearly as crazy as most investors would believe it to be. Let me explain why.

Alphabet Inc (GOOGL): A Crazy M&A Idea That Could Pay Dividends

The idea came to me in two parts.

Nest Cam IQ to the Rescue

First, my fellow Canadian and InvestorPlace contributor Brad Moon recently wrote a piece about Nest’s new high-resolution indoor security camera, dubbed Nest Cam IQ. It allows homeowners to detect strangers in the house by utilizing Google’s machine learning technology to get the job done.

It’s kind of Big Brother, “1984” stuff, if you ask me, but Brad’s a tech geek on a level I could never get to, so if he thinks it’s a big deal, it’s a big deal.

From an investor standpoint, this is significant because Google paid $3.2 billion for Nest back in 2014 and hasn’t had much to show for its purchase since. The Nest Cam IQ, as well as other products expected to launch by the end of 2017, suggest its hibernation is over.

That’s great news for GOOGL stock.

Automation Taking Hold

The second seed for my idea comes from a May 25 Los Angeles Times article about Carrier, the Indiana air-conditioning company owned by United Technologies Corporation (NYSE:UTX). 

According to the article, Carrier informed the state of Indiana that it would begin layoffs that would result in the transition of 632 jobs from Indianapolis to Mexico, jobs President Trump supposedly saved during the election campaign. Clearly, in addition to many of the president’s obvious flaws, he’s atrocious at math.

“Carrier stepped it up, and now they’re keeping over 1,100 people,” Trump told an audience of cheering factory workers last December. “And by the way, that number is going to go up substantially as they expand this area, this plant.”

Actually, Donald, 1,400 minus 632 is 768, not 1,100.

To make matters worse, the $16 million Trump said could increase the number of jobs saved above 1,100 will reduce it below 768, according to UTX CEO Greg Hayes.

“What that [automation] ultimately means is there will be fewer jobs,” Hayes told CNBC’s, Jim Cramer.

I’m not sure what this means for GOOGL stock, except that it’s nicely positioned to benefit from automation and artificial intelligence.

Google Rules the Home

Between Nest, Google Home, Google Fiber, Google Play, Gmail, Daydream View, Google WiFi, and Waymo, Alphabet is doing a pretty good job infiltrating our homes.

Why not go all the way and buy Whirlpool, using its knowledge and practical usage of artificial intelligence to make our appliances truly connected in a way only a mega-tech company like Google could?

Right now, Whirlpool has a market cap of $14.1 billion and, more importantly, an enterprise value of $17 billion. WHR stock hasn’t done much since early 2015 — down 3.9% from January 2, 2015 through May 31 — so the premium Alphabet would have to pay isn’t nearly as great as you might think.

A study from 2014 suggests the average premium is 37%. Using that amount, Alphabet would have to pay $22.2 billion for Whirlpool, including debt. That’s 22 times the $1 billion in free cash flow Whirlpool expects to generate in fiscal 2017.

I know, that seems like a lot.

GOOGL stock currently trades at about 25 times its 12-month trailing free cash flow of $27.7 billion. To pay 22 times FCF for a company that makes fridges, stoves and other large appliances probably seems crazy, but once you integrate Nest and all the other Google goodies, I’m betting automation will boost FCF as a percentage of revenue much higher than the present 5%.

Bottom Line on GOOGL Stock

At the end of the first quarter, Alphabet had $92.4 billion of cash on its books and just $3.9 billion in debt. It can afford to break out the piggy bank for this type of acquisition.

Call me crazy, but I think that if Google wants to dominate the home, this is the perfect Trojan horse.

Thanks for the idea, Brad.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/alphabet-inc-googl-crazy-ma-idea-that-could-pay-dividends/.

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