Google deal machine adjusts to slow times

SAN FRANCISCO (Reuters) - After years of gobbling up companies, Google GOOG.O is on a diet.

People ride their bikes past Google Inc. headquarters in Mountain View, California, May 8, 2008. REUTERS/Kimberly White

The Internet giant has not announced an acquisition in six months, a significant slowdown considering its tally of more than 30 deals since 2005.

Google Chief Executive Eric Schmidt acknowledged the slowdown earlier this month, telling investors at a conference that prices are still too high for his liking and that Google’s mergers and acquisition efforts are “pretty inactive.”

But some observers say that Google, which has nearly $16 billion (10.8 billion pounds) in cash and securities in its coffers, may not be out of the deal market for long. In the highly competitive world of Internet software, companies like Google need to look outside their walls for new technologies and growth opportunities.

“CEOs can say all they want about sitting on the sidelines, but if the right deal comes up at the right price, they’re going to think about it,” said UBS analyst Ben Schachter.

Rumours have recently swirled about Google having its eye on social-networking upstart Twitter and online travel agency Expedia EXPE.O.

Google doesn’t comment on deal rumours, and analysts are split about the feasibility of either rumoured combination. Expedia would mark a sharp departure from Google’s track record in acquisitions and overall strategy focussed on search, while Twitter offers some intriguing features but its business model remains unclear, they said.

Expedia has a market value of about $2.3 billion, and its shares are down 70 percent from a high in May 2008. Privately held Twitter -- which lets users send short, 140-character messages -- is harder to value, though deal talks with Facebook last year had reportedly valued the microblogging site at $500 million, according to blog and media reports.


It’s clear that Google continues to keep tabs on potential deal opportunities.

A scout from Google’s corporate development group -- the unit that oversees mergers and acquisitions -- was on hand at a Silicon Valley event last Wednesday organized by venture firm Y-Combinator, at which a crop of start-up firms pitched their ideas to a select crowd of investors.

Last July, Google acquired video-sharing start-up Omnisio, four months after the company made a presentation at another Y-Combinator event.

Karim Faris, a member of Google’s corporate development team who was at the Wednesday event, said the market downturn was still not completely reflected in the valuations that many private and public companies estimate for themselves -- an adjustment that he said could take another quarter or two.

The majority of Google’s acquisitions have involved small, privately held companies priced from $20 million to $50 million, according to a person familiar with Google’s business who was not authorized to speak publicly.

Google’s two largest acquisitions to date are online advertising company DoubleClick, which it bought for $3.1 billion in 2008, and video-sharing site YouTube, which it bought for $1.65 billion in 2006.

The draw for Google is usually a company’s engineers or its technology.

“They’re all very young,” Paul Buchheit, a former Google engineer who went on to co-found FriendFeed, said of Google’s acquisitions. “What they have are some developers who are very talented and have a promising direction.”

With Google now focussed on keeping costs in line, Buchheit said the company may have a less pressing need for those types of acquisitions: “I think they have said they’re kind of slowing down hiring. So I would expect that there would also be somewhat of a slowdown in talent acquisitions, simply because Google is trying to do more with what they already have.”

Still, Buchheit said he doubted that Google would take a pass if the company discovered an amazing team of engineers.


The increasing popularity of Twitter has raised speculation that Google may see a need to co-opt the service in order to protect its own multibillion dollar search business. Twitter has a so-called real-time search capability for users to sift through the flood of messages for up-to-the-minute conversation about any particular topic.

Merus Capital co-founder Sean Dempsey, who formerly worked in Google’s corporate development group, said acquisitions aimed at extending Google’s businesses, such as YouTube and email security company Postini, are relatively unusual.

Dempsey was not sure if Google would approach a company like Twitter, but he noted its motivations for acquisitions have usually involved more than purely defensive thinking.

“There needs to be some strategic opportunity,” he said. “The goal can’t simply be ‘Let’s avoid having someone else own this.’”

Reporting by Alexei Oreskovic; editing by Tiffany Wu, Richard Chang