Three Companies Google Should Buy

• Posted by Tech Insidr
• on July 28th, 2011

Google’s dominance in search is unparalleled, but any company who derives nearly all of their revenues from a single product is definitely vulnerable.  Regulatory fears are also a big concern since the FTC has recently launched a full probe into Google’s search practices.

The idea that Google ($GOOG) needs to diversify their revenue streams and expand into new businesses is certainly a valid claim.  If the FTC penalizes Google for using faulty anti-competitive practices, their cash-cow search business is certainly at risk. Even though the company is working to expand into new markets, Google currently generates roughly 90% of their revenues through their core search business.

At this stage, establishing new revenue streams is critical for Google if they want to mitigate the risks of regulatory action.  With $39B in cash as of 6/30/2011, Google certainly has the bankroll to explore some major acquisitions.

So what hot markets should Google go after?  Two focus areas stand out to me:  social media and local.

Social Media

Although social media seems like an area where Google would hit pay dirt, the company has struggled to bring compelling social networking tools to the market. Some analysts have said that social media is Google’s achilles heel.

The social web is increasingly important, as these popular social networking hubs are becoming the top destinations on the web and gradually replacing portal sites like Yahoo!.

Google has released products like Orkut, Google Buzz, and Circles, but so far the reaction from users has been tepid.  Google +, which is their latest social networking project, is gaining momentum but it still has a long way to go before it can compete with the likes of Twitter, Facebook, and LinkedIn.

 

Local

The local deal market is one of the fastest growing markets in the history of the tech world.  Tech-savvy consumers are using these deal sites to find appealing offers in their local communities. These services are a disruptive force in the marketplace because they allow consumers to score up to 50% off on certain local restaurants and businesses.

Groupon, the leader in this space, is set to go public at a $25B valuation and LivingSocial recently announced their intention to go public as well. Google is seeking entry into this market through their Google Offers platform, but the company is still well behind their competitors.

So how can Google expand into these markets?  Here are some social media and local plays that the company should look at.

Founded in 2004, Yelp.com is a site that allows consumers to leave reviews of local businesses. The site has a devout following and traffic continues to grow as consumers embrace it as a “go to” source for reviews in their local communities. Yelp reviews are a prime example of how a personalized review can ultimately end up driving purchasing decisions.

As far as their revenue model, Yelp allows businesses to promote special offers and buy advertisements on the site.  The company is expecting revenue to grow by 50% in 2011 and their international growth is definitely accelerating.  According to traffic metrics Alexa, Yelp is currently the #34 most visited website in the US.

Yelp would provide Google a rich repository of data on businesses in a variety of local markets.  Also, Google could integrate Yelp reviews/functionality with their existing Google Maps product, which would help Google gain the local presence they are going after.

Although Google walked away from a $500M deal for Yelp in 2009, I think it makes a lot of sense for them to go back to this well again.  Yelp is a vibrant property that has a lot of natural synergies with Google’s existing search business.

 

Google has really struggled to bring competitive social media products to the market. Their latest project, Google +, is certainly promising, but it’s also 5 years late to the market in my estimation.  Better late than never?  Sure, but being 5 years late to the market never helps.

As the social web becomes more mature, scale becomes more and more important. How can you compete with Facebook’s 750M active/engaged users when your new platform only has 20M users?

One way for Google to make a big splash into the social media area is to make a bid for Twitter.  As one of the hottest social media sites on the net, Twitter allows users to broadcast and share information in real-time.  The site has revolutionized the way we communicate and share information across the internet.

Twitter’s valuation is also more reasonable compared to LinkedIn and Facebook, given that Twitter has yet to monetize their platform as well as their competitors.  If Google is serious about being a major player in social media, a Twitter bid makes a lot of sense.

 

Founded in 1998, OpenTable ($OPEN) allows consumers to make restaurants reservations using the web.  Restaurants pay OpenTable a startup fee and a monthly subscription to use this technology.

The company is solid from a profitability perspective, but there have been some growing pains along the way.  OpenTable’s CEO recently left and lackluster earnings have weighed on the company’s stock price.  I think this provides an excellent opportunity for Google to swoop in and breathe new life into the company.

OpenTable makes a lot of sense for Google because of the natural synergies that exist between Google’s existing products.   Google could integrate OpenTable into their Google Offers platform or in their Google Maps program.  Imagine if you could search for a restaurant on your iPhone using Google Maps and reserve a table instantly?  I definitely think there is a lot of value there.

As far as the valuation, OpenTable is currently valued at $1.7B and the company is solid from a profitability perspective.  I definitely think that is a fair valuation for such a high-quality company. Integrating OpenTable into Google’s existing platforms would be relatively seamless.

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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