October 28, 2019 / 9:15 PM / 16 days ago

Breakingviews - Alphabet at risk of middle-aged M&A spread

An illuminated Google logo is seen inside an office building in Zurich September 5, 2018. REUTERS/Arnd WIegmann

NEW YORK (Reuters Breakingviews) - Alphabet still runs fast, but its pace is slowing. It’s a common problem that comes with aging. A potential bid for device-maker Fitbit could bring new youthful energy for the $880 billion firm, or just a slightly expanded waistline.

The owner of Google showed on Monday that its core business of selling online ads still pumps out profit. Alphabet’s revenue hit $40.5 billion in the third quarter of the year, an increase of 20% from last year. But that’s less rapid than its rate a year ago. Internet advertising is maturing and rival Amazon is pushing hard – that business is the main component of a part of Jeff Bezos’ e-commerce giant that grew over 40%.

The offer for Fitbit that Reuters reported, citing sources, has some logic. Alphabet co-founder and Chief Executive Larry Page has made pushes in mobile devices, smart contacts and delivering broadband via balloon among others. Acquisitions played a part in several of these efforts. While some proved wildly successful – its mobile ad business success can be pinned in large part to buying the maker of the Android operating system – others, such as fiber broadband, have been duds.

Healthcare is an area where Google has had little visible success. Perhaps Fitbit’s experience in designing wearables will help Alphabet make useful devices for heart-rate monitoring or glucose monitors. Alphabet could bring heft that Fitbit on its own lacks. The stock is down 70% from its initial public offering in 2015, partly due to the success of Apple’s Watch.

Growing sideways brings pitfalls. As well as being a distraction, an Alphabet bid for Fitbit could draw political scrutiny. Data collected by health trackers is particularly sensitive in the eyes of regulators and antitrust watchdogs have said such information would become a more important part of merger reviews. Fitbit is also a consumer brand members of Congress are likely to understand, or even use.

Fitbit is tiny enough to swallow whole – its market capitalization at Friday’s close was just $1.1 billion – and the revenue potential from diversifying into healthcare and medical tracking devices is large. That, though, has to be weighed against the risk of regulatory flack, and a sense that Google is losing focus. There are better ways to regain a youthful stride.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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