Google Steps Up Acquisitions as Some Internal

Projects Falter

August 11, 2010, 12:18 AM EDT

By Brian Womack

Aug. 11 (Bloomberg) — Google Inc. Chief Executive Officer Eric Schmidt has doubled the anticipated pace of acquisitions this year and expects to maintain that rate after some internal projects have failed to spur growth.

“The opportunities are there,” Schmidt said in an interview from the company’s Mountain View, California, headquarters this week. “We can afford it. We’re in a mode of investment for the long term.”

Google, the search engine with almost two-thirds of the U.S. market, is making acquisitions every couple of weeks — more than the once-a-month pace Schmidt projected when it began buying companies again last year after the recession. Its latest deal was last week’s purchase of Slide Inc., which makes games for social networks.

The company is snapping up startups in social networking, mobile technology and graphical advertising — areas where its homegrown efforts needed outside help. Google still gets more than 90 percent of revenue from its traditional advertising business, and it’s stopped work on projects such as the Wave collaboration site because they didn’t bring in enough users. The company also has struggled to keep pace with the growth of Facebook Inc.

“They’re trying to keep up with a rapid rate of innovation in the online world,” said Clay Moran, an analyst at Benchmark Co. in Boca Raton, Florida. He recommends buying the stock, which he doesn’t own. “One way is to that is through external sources. You could certainly argue that they haven’t been able to do it internally as well as they would have liked.”

Antitrust Regulators

Increased antitrust scrutiny adds a hurdle to acquiring more companies. That won’t deter Google from seeking out deals, Schmidt said. The company’s purchase of AdMob Inc., which made it the largest U.S. seller of mobile advertising, won clearance from the Federal Trade Commission in May after months of review.

Last month, Schmidt said he expects a “significant review” for Google’s planned purchase of search-data provider ITA Software Inc.

“We will do the right thing for end users, and we will fight the other issues second,” he said. “We will go after it. We will try to convince everybody that we’re right.”

Google has announced or completed at least 18 acquisitions this year, following the purchase of about five companies last year, according to Bloomberg data. In most cases, Google didn’t disclose terms.

Cash Hoard

Using cash to buy startups is better than letting it sit on the balance sheet, earning a low interest rate, said Andy Miedler, an analyst with Edward Jones in St. Louis. Google had more than $30 billion in cash and marketable securities at the end of the last quarter.

“For quite a while, growth is mainly going to be driven by search,” said Miedler, who advises buying the stock and doesn’t own it. “We need to see the next leg of growth.”

Google’s internal research, which cost $2.84 billion last year, has a mixed record of creating growth opportunities. The Wave service, introduced last year in a bid to change the way Internet users share documents and photos, was discontinued this month because of slow adoption.

In social networking, Facebook has eclipsed Google’s efforts. Google’s Orkut network had 54.6 million users worldwide in June, up 5 percent from a year earlier, according to ComScore Inc. in Reston, Virginia. Facebook had about 10 times that amount and grew more than 60 percent during the same period. Google’s Buzz, a social service tied to Gmail that debuted in February, hasn’t threatened Facebook’s dominance either.

Stock Drop

Google’s shares have slid 19 percent this year, compared with little change for the S&P 500 Index. The stock fell $1.64 to $503.71 yesterday on the Nasdaq Stock Market.

The purchase of Slide will boost the company’s social- networking technical knowledge, Schmidt said. The deal follows the acquisition of Aardvark early this year, a search company that includes social features. Even so, Google isn’t trying to create “another Facebook,” he said.

Schmidt declined to give specifics on what Slide will do for Google. The company already includes social elements in many services, such as Gmail, Google Docs and its photo site Picasa. Google paid about $200 million for Slide, according to people familiar with the matter.

“The answer is not knowable by me today — that’s why we bought them,” Schmidt said. “We will discover it together.”

Taking Risks

Schmidt’s ability to manage multiple products in various stages of development will serve him well as the company looks for new areas of growth, said Tim Armstrong, a former Google executive who now runs AOL Inc.

“It takes an ability to keep taking risks,” Armstrong said. “Eric has done a good job of continuing to take bets. If you look at most major companies over long periods of time, the only way to make a company successful at Google’s size is to innovate within, acquire and have the combination of innovation from within on top of an acquisition.”

Facebook is increasing competition for online advertisers, which are warming to the idea of pitching their products on social networks. The company became the No. 1 U.S. provider of display advertising in the first quarter, according to ComScore. Display ads — a market previously led by Yahoo! Inc. — consist of banners or videos, rather than the text message used in most search ads.

Big Business

Google’s next $10 billion businesses will probably be in the display-advertising and mobile markets, Schmidt said. He didn’t estimate how long that will take to generate that kind of money, and Google doesn’t break out results from those businesses.

Android, a smartphone operating system developed by Google, is key to the mobile effort. The software, which Google gained through a 2005 acquisition, is making gains on Apple Inc.’s iPhone. Android will be in 75 million smartphones by 2012, topping the 62 million expected for the iPhone, according to research firm ISuppli Corp.

Still, Google makes no money directly from Android, which is offered free to phone manufacturers. The benefit comes in helping steer mobile interfaces and driving more advertising to devices.

Google’s push into display ads was bolstered by another acquisition, the 2008 purchase of DoubleClick Inc. The company became dominant in the online video market by buying YouTube Inc. in 2006, giving it a new source of advertising revenue.

The reliance on acquisitions doesn’t mean Google isn’t adding its own value, Miedler said. The company cultivates the companies after it purchases them, he said. YouTube’s advertising program, for instance, was developed under Google.

“It’s buy it and make it better,” he said.

Google is more than capable of developing new products internally — even if it has a few missteps, such as Wave, he said. It’s part of what keeps Google operating with a “venture” culture, Schmidt said.

“We try stuff, and when it hits, it hits big,” he said. “We don’t need that many to hit big to have a big impact.”

Gilbert Pagan