Technology giant Alphabet (NASDAQ:GOOG) shocked the world in November when they announced a $2.1 billion acquisition of struggling wearables maker Fitbit (NYSE:FIT). The all-cash bid pegged Fitbit’s takeover value at $7.35 per share. The day the deal was announced, Fitbit stock traded as high as $7.26, a stone’s throw from that takeover value.
Yet, three months later and just days ahead of its fourth quarter earnings report, Fitbit stock trades below $6.50. That’s more than a 10% discount to Alphabet’s all-cash offer price.
Why the huge discount? Investors are increasingly concerned that the acquisition won’t get past anti-trust regulators, who are concerned that the deal gives Alphabet too much private data on consumers. Considering that data privacy has been a political hot topic recently, such concerns feel somewhat justified.
But, justified to the point of a pricing in a 10%-plus discount into the stock? No. I think this discount is far too big.
By my estimation, this acquisition will clear regulatory hurdles within the next few months. When it does, shares of Fitbit will surge by than more 10% to the $7.35 takeover price.
Regulatory Concerns
Fitbit stock trades at $6.50 today primarily over regulatory concerns surrounding Alphabet’s planned acquisition of the company.
First, it should be stated that this is an all-cash acquisition from a company with a ton of cash, so there’s no risk of Alphabet not having the resources, or having to fund the acquisition with debt, or having the takeover price tied to Alphabet’s stock price. There’s none of that. It’s a very secure and stable offer to takeover Fitbit at $7.35 per share.
Second, it should also be known that Fitbit shareholders overwhelmingly approved the deal, by a count of 415.2 million votes for the deal and just 1 million votes against it. So, there’s also no shareholder approval risk here.
Instead, all the risk inherent to the Alphabet-Fitbit acquisition comes to down to regulatory approval risk. Regulators across America, Europe, and Australia have expressed concern that in acquiring Fitbit, Alphabet would acquire a plethora of healthcare data, and that the company’s portfolio of personal consumer data would become too big and too intimate. If such risks lead to regulators blocking the deal, Alphabet will be forced to imagine creative ways to re-work the deal (which may include a lower takeover price), and/or may be inclined to scrap the deal altogether.
But, are such regulatory concerns likely to shelve this acquisition? Or are they just for show and mostly noise?
I think the latter. Here’s why.
Fitbit Stock will Rise
In short, Fitbit simply isn’t big enough, nor is Alphabet established enough in the smart devices market, to warrant regulators blocking this deal on the basis of Alphabet acquiring too much personal data from smart devices.
Fitbit has 28 million active users in the world, selling just 3.5 million devices last quarter. Meanwhile, the number of Pixel phones Alphabet has sold is likely somewhere in the tens of millions range.
Those are decent numbers, but in the context of other tech giants in this space, they’re pretty small. Consider that Apple (NASDAQ:AAPL) alone has 1 billion iPhone users in the world, and is the runaway leader in the smartwatch space, selling about three-times as many smartwatches as Fitbit last quarter.
Thus, a combined Alphabet-Fitbit would still be way smaller than Apple. If regulators aren’t breaking down the doors over at Apple, I’m not sure why they would block Alphabet’s acquisition of Fitbit.
And one could very reasonably argue that Alphabet’s acquisition of Fitbit provides necessary competition to Apple in the smart devices space, and that such competition is actually a positive from an anti-trust perspective.
Bottom Line
Ahead of its fourth quarter earnings report, Fitbit stock is trading at a sizable discount to Alphabet’s all-cash takeover price. This discount should not be so large, given that regulators will likely approve this deal. As such, buying the stock on further weakness over the next few weeks to months seems like a fairly good strategy.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
