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Does Alphabet Inc. (NASDAQ: GOOG) Have a New Takeout Target?

Written by Jason Stutman
Posted February 9, 2019

Since 2001, Alphabet Inc. (NASDAQ: GOOG), best known by the public as parent to Google, has acquired a massive collection of over 230 different companies.

As a matter of habit, the tech giant has historically veered away from the public sphere, mostly swallowing up private tech companies, particularly those in its own backyard (the San Francisco Bay Area).

This pattern, needless to say, has largely kept Main Street investors out in the cold, yet that doesn’t mean Alphabet has shown no interest in publicly traded businesses whatsoever. The company’s 2016 acquisition of software firm Apigee (formerly traded under the ticker APIC), for instance, remains one of its biggest buyouts to date.

Yet while Alphabet is working with one of the largest cash piles in the world, that doesn’t mean it tosses money around with disregard. Apigee investors didn’t make out quite as well as an acquisition by the world’s fourth largest tech company might suggest: It was bought for less than a 7% premium at $625 million. A win, for sure, but it’s nothing to write home about.

That said, Alphabet has grown up over the years, and it shouldn’t be perceived as a coincidence that the company has more recently begun to dip its toes into publicly traded waters for acquisition targets. There are only so many Silicon Valley startups out there with meaningful synergies, and at some point, Alphabet has to set its sights on more established, publicly traded competition.

Now, rumors are stirring that Alphabet has yet another publicly traded takeout target in its sights, and if true, this one would be more than 10 times as big as the Apigee purchase.

It would also mark Alphabet’s second-largest acquisition to date, the only contender being its $12.5 billion purchase of Motorola Mobility back in 2012.

So what is this publicly traded company, and why is it now being considered a leading takeout target by Alphabet? Well, let’s get a bit of perspective first.

It’s All About the Cloud

Cloud computing is experiencing explosive growth, and the majority of enterprises are now using applications in the cloud. In fact, in a survey by RightScale, 96% of respondents now say they use the cloud.

All told, the cloud industry is now pushing well above $70 billion a year, and much of the growth we’re seeing today in the world’s biggest tech companies stems from their cloud initiatives.

Amazon’s cloud business (AWS), for instance, grew 45% year over year as of its latest 10-Q. AWS now generates more operating income than all of Amazon’s other businesses combined.

Microsoft’s cloud segment is growing at an even faster pace, with Azure revenue up 76% year over year. That compares to just 12% overall revenue growth for the firm. Now widely regarded as the “king of the cloud,” Microsoft recently overtook Amazon by market cap, briefly holding the spot of the world’s largest company for the first time in decades.

IBM can be considered a tertiary player, but the pattern is the same. Cloud revenue at the firm is significantly outpacing its broader top line, with 12% growth versus 1% overall growth.

As for Alphabet, Google isn’t breaking out its exact cloud revenue (at risk of looking like a weak competitor up against Amazon and Microsoft), but CEO Sundar Pichai at least gave some color in the company’s most recent conference call, calling Google Cloud “a fast-growing multibillion-dollar business.”

Market analyst firm Canalys currently estimates a run rate of $2.2 billion per quarter for Google Cloud. We can assume we’re somewhere in that ballpark, but it’s not so important.

Whatever the figure, Alphabet’s cloud ambitions are apparent enough. It should be of no real surprise that we’re now hearing rumors that the company wants to acquire one of its cloud partners.

If You Can’t Build it, Buy it

To understand why Alphabet would want to scoop up this company, we need to first understand a little about how Google Cloud works. You can connect to the Google Cloud in two ways:

The first way is through Google’s Dedicated Interconnect. Dedicated Interconnect provides direct physical connections between a customer’s network and Google’s network, which currently remains limited.

The second way is through Google Cloud’s 30 or so Interconnect Partners. These partners allow Google to expand its market access past its own network, but, as middlemen generally do, they make the company’s cloud operations less cost effective.

Unfortunately for Google, it can’t outright buy all these partners and their networks. Purchasing power aside (even Alphabet doesn’t have the cash reserves to swallow all these partners up), the company would run into some major antitrust barriers.

More likely, if Google is to start making acquisitions, it will do so in a targeted manner, and, more so than any other company on the Interconnect Partners list, one in particular stands out.

One thing that would attract Google to this company is the fact that it provides critical cloud infrastructure to over 50 providers through a 130,000-mile network connecting to thousands of buildings and data centers.

More timely, though, this company was just targeted with a hostile takeover by Blackstone Group and Stonepeak Partners last November. According to Bloomberg, CenturyLink is eyeing the firm for a takeover as well.

For Google, this means it’s crunch time to make a bid, if it ever intends to do so.

A Buy on Buyout Rumors?

For investors, that doesn’t mean it’s time to bet the cards on an acquisition (betting on M&A is usually a bad idea), but the growing interest from smart money and big tech is a telling signal that this company carries substantial value.

Unfortunately, I can’t reveal the name of the company here, but I can tell you that it is one of the three stock picks in our immensely popular 5G report. We first pinpointed this company to our members last summer, and now it’s on its way to becoming a household name.

For the full details, I recommend that you review our video presentation on the market’s hottest 5G opportunities here. Buyout or not, this is an opportunity you won’t want to miss.

Until next time,

  JS Sig

Jason Stutman

follow basic @JasonStutman on Twitter

Jason Stutman is Wealth Daily's senior technology analyst and editor of investment advisory newsletters Technology and Opportunity and The Cutting Edge. His strategy for building winning portfolios is simple: Buy the disruptor, sell the disrupted.

Covering the broad sector of technology and occasionally dabbling in the political sphere, Jason has written hundreds of articles spanning topics from consumer electronics and development stage biotechnology to political forecasting and social commentary.

Outside the office Jason is a lover of science fiction and the outdoors, and an amateur squash player at best. He writes through the lens of a futurist, free market advocate, and fiscal conservative. Jason currently hails from Baltimore, Maryland, with roots in the great state of New York.

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