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Since coming public in 2004, as shown by the chart below, Google (NASDAQ:GOOG) shares are up more than 700%. While I believe the future is still bright for GOOG, I believe that the future can be brighter than the past if GOOG buys the world's largest social media site, Facebook (NASDAQ:FB).

GOOG ChartGOOG data by YCharts

Facebook Is Google's Biggest Threat

In my opinion, Facebook is a huge threat to GOOG. While Facebook has not been able to capture much of the search market yet, this could change. Facebook has a unique advantage over GOOG in that it is the world's largest social network. Comparably, Google+ does not match up to Facebook, and I doubt this will change anytime soon. One of the unique advantages Facebook has is that it is incredibly difficult to switch away from Facebook to Google+. Even if Google+ is a better product, users are already committed to Facebook at this point. Contrastingly, in my view, it is much easier to switch where you search. To better understand my point, try using Yahoo or Bing for a day instead of Google. You will likely have no difficulty obtaining the same information you would have found using Google. Contrastingly, try using Google+ for a day instead of Facebook. You will not be able to see what is going on in the lives of most of your friends and many of your friends will not see any updates you make. In short, though both Facebook and GOOG are thriving today, Facebook is a much bigger threat to GOOG than GOOG is to Facebook.

Google Knows Monetization

GOOG has proven to be, by far, the most successful online monetization company in the history. So far, Facebook has proved less successful at monetization. Perhaps with help from GOOG, Facebook would be able to better monetize its user base.

Decreased Competition

Currently, the most popular, or for lack of a better word, most visited, site in the world is Google, followed by Facebook, YouTube and Yahoo. GOOG already owns YouTube. If GOOG were to buy Facebook, then GOOG would own the three most popular websites in the world. Given this, GOOG would likely be able to charge higher rates for advertising as competition would be decreased.

Google Has Cash

Right now, GOOG has just over $50 billion or $151 per share in cash. So far, GOOG has yet to find a use for this cash. Based on current stock valuations, Facebook is worth $58 billion. However, it must be noted that Facebook holds close to $10 billion in cash. Of course, if GOOG is to be successful in buying Facebook, a large premium must be paid, possibly above the $38 Facebook IPO price. While GOOG should use a good portion of its cash to make the offer, a stock component is also possible. Better yet, GOOG could issue a large amount of debt. This may be a good way for GOOG to take advantage of the historically low interest rate environment.

Conclusion

While it might sound crazy to some, in my opinion, it makes a lot of sense for GOOG to buy Facebook. Both Facebook and GOOG would be worth more together, playing for the same team, than they are competing against each other. Also, by buying Facebook, GOOG is able to eliminate one of the biggest threats to its current business model. Perhaps, this is the most valuable aspect of the deal for GOOG. While I am currently mildly bullish on GOOG, I do not own the stock because I view Facebook as too much of a potential long-term threat. If GOOG buys Facebook, I will likely be a buyer of GOOG stock, as I think the deal would ensure GOOG's dominance over online advertising for at least another ten years. (I say ten years because that is roughly how long it has taken for Facebook to go from a start up to the second largest site in the world) Of course, Facebook will not be the last threat to GOOG, but the next major threat will be unlikely to emerge for some time.

Source: Why Google Should Buy Facebook