Shares of real estate sites Zillow (Z) and Trulia (TRLA) both traded higher on Wednesday January 23, after "hearing unconfirmed chatter" of a Google (GOOG) or Realogy bid for Zillow. The "report" was nothing more than a tweet by news site Benzinga, and provided no proof of a pending deal. While the tweet itself seems more impulsive or a matter of opinion, there might actual be some substance to the suggestion.
The rules are different in Silicon Valley. What may appear to be a totally ridiculous acquisition price might not be unusual for a tech company such as Google. Google has completed more than 100 acquisitions since its existence, creating much of its diversified business through these acquisitions. To better explain, let's look at a few of the bigger acquisitions since 2005.
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There is a public perception that Google is an in-house development company that sits and creates all of its innovating services with the team of engineers that it has hired. In reality, as you can see in the chart, many of its biggest services were acquired. This shows that not only does Google have a great eye for hiring top engineers but also for finding the best companies to buy.
Google does not discriminate: It will buy anything from social and tech to services and hardware. Nor does the company care what you think when seeking an acquisition: Looking back most of its acquisitions have been for massive premiums compared to fundamentals and have been questioned by analysts and investors. Therefore, this makes it very difficult to get into the minds of Google execs to determine what move they might make. The company is simply too diverse in its acquisition approach. In fact, the only common trait is that almost all of its acquisitions have headquarters on the West Coast of the U.S., staying close to home.
Will Google Buy Zillow?
Google has advertising, it has reviews, maps, self-driving cars, travel accommodations, etc. yet it does not have a good real estate platform. With that being said, it makes sense that Google would show some interest in Zillow, a profitable company with growing revenue that is based on the West Coast.
The company has more than 110 million U.S. homes on its database and continues to grow in daily traffic, but just think of what it could become under the Google umbrella of services. In comparison to Trulia, Zillow has much more consistent growth, is more efficient with better margins, and is priced almost equal on a revenue/value basis. Therefore, it is not out of the realm of sanity to suggest that Google might very well be showing interest, and that Benzinga's tweet had more confirmation than we might know.
Just to be fair, I am not suggesting that Google will acquire Zillow, but rather I wouldn't be surprised to see it occur because of its history as an acquirer. The company has been known to make some bold moves that make little sense at the time, but almost always seem to work out. In fact, Google could very well acquire Trulia and not Zillow. Personally, I think both are overvalued, but in the social media landscape, dotcom bubble prices often still exist (think Instagram).
On October 9th 2006, Dallas Mavericks owner Mark Cuban published a blog entitled, "I still think Google is Crazy :)". The post was published on his blog "Maverick" and criticized the tech giant for its acquisition of YouTube. The Mavericks owner provided details on why Google is crazy for purchasing YouTube for $1.65 billion, focusing on its copyright and legal claims. I find this somewhat ironic seeing as how Mark Cuban obtained his wealth with a dotcom startup, which was acquired, but never materialized into an operational service.
Mark Cuban's post may look crazy now, but looking back there were a lot of people who felt as though YouTube was nothing more than a garage start-up company or a flavor of the month that would ultimately fail due to lawsuits and copyright law. In a previous article I explained how it's easy to live in the present day while knowing the outcome of a past event, but it's hard to look back and fully understand the mindset of people in that moment.
Back in 2006, there were a lot of people who doubted the YouTube acquisition, but looking back it was a great deal, and Google has a good track record when it comes to acquisitions. I am not suggesting that Zillow will become the next YouTube. But at $45 the company would be worth $1.5 billion, and I do think that Google has the resources and the outreach to grow Zillow much faster than Zillow would ever achieve by itself. Google can utilize Zillow both as its own company and then in other ways that I am not fully capable of understanding. Therefore, for those people who are already saying the deal won't happen and that Google would be crazy, I suggest you look at both sides of the story, the history of Google, and then reassess your statement that "it will never occur."
Disclosure: I am long GOOG.