Bloomberg News

Google-Nest Heats Up Takeovers in Race to Control Home: Real M&A

January 28, 2014

A Nest Labs Inc. Digital Thermostat is Displayed in a Store

Google announced on Jan. 13 that it was buying closely held Nest, led by Tony Fadell, the former Apple Inc. senior vice president who helped create the iPod. Photographer: David Paul Morris/Bloomberg

Google Inc. (GOOG:US)’s $3.2 billion purchase of a digital thermostat maker may jump-start a multibillion-dollar race to acquire companies that are powering the rise of Web-connected devices across homes, cities and workplaces.

After Google agreed to buy Nest Labs Inc. this month, competitors such as Microsoft Corp. (MSFT:US) also may be looking to snap up companies with the technology and patents for smart devices, said Recon Analytics LLC. The market for the so-called Internet of Things -- which ranges from Web-enabled home appliances to centrally linked industrial equipment -- is estimated to generate $8.9 trillion in revenue by 2020, up from $4.8 trillion in 2012, according to researcher IDC.

Google’s bet on Nest could next shine the takeover spotlight on companies such as Control4 Corp. (CTRL:US), which integrates lighting, video and security operations across the home, Wedbush Inc. said. Silver Spring Networks Inc. (SSNI:US), the maker of technology that helps utilities and cities create smart sensor networks, and Echelon Corp., which makes chips that enable devices to be controlled remotely, also may be targets, said Canaccord Genuity Group Inc. Shares of Echelon and Control4 rose more than 35 percent the day the Nest deal was announced.

“Google buying Nest, it kind of ignites the space,” Mark McKechnie, a San Francisco-based analyst at Evercore Partners Inc., said in a phone interview. “Everybody talks about the Internet of Things as the next big thing. It’s almost like putting smartphones onto homes, cars, people.”

New Market

Google announced on Jan. 13 that it was buying closely held Nest, led by Tony Fadell, the former Apple Inc. senior vice president who helped create the iPod. The $3.2 billion price is almost double what Google spent to buy the YouTube video site in 2006. It also exceeds the $1.4 billion in revenue that the global smart-thermostat market is projected to generate in 2020, according to Navigant Research. Nest also makes a smart smoke detector.

“This market is fairly new,” John Quealy, a Boston-based analyst at Canaccord, said in a phone interview. “We haven’t seen any standard valuations yet.”

Companies including Cisco Systems Inc., AT&T Inc., ARM Holdings Plc, General Electric Co. and Intel Corp. have been aiming to make money by providing software, hardware, components or connectivity to a variety of wireless, connected gadgets -- ranging from smoke detectors to industrial equipment and wristwatches for soldiers.

Xbox Ambitions

Microsoft is trying to make Xbox the center of home entertainment, and it may also want to make an acquisition to transform the gaming console into the command center for controlling devices ranging from thermostats to appliances, said Tom Taulli, who analyzes acquisitions for Los Angeles-based IPOPlaybook.com. A representative for Microsoft declined to comment.

“The ultimate path for all these companies is to be omnipresent in our lives,” Roger Entner, an analyst at Recon Analytics, said in an interview. “It doesn’t matter if you are Google or Microsoft. They want to collect as much information as possible.”

While Nest may not set the benchmark for industry takeovers, shares of Control4 rose 70 percent in two days after the deal was announced and Echelon (ELON:US) climbed 36 percent in one day.

Today, Control4 added 6.6 percent to $26.53, while Echelon increased 19 percent to $3.68. Silver Spring rose 0.3 percent to $15.89.

‘Cool Devices’

Control4, whose market value has risen to $567 million since its initial public offering in August, offers the ability to manage many smart devices -- ranging from thermostats to light dimmers -- in homes and businesses. While Echelon and Silver Spring are still losing money, Control4 is projected to report its first full-year profit (CTRL:US) for 2013, on $129 million of revenue, according to analysts’ estimates (CTRL:US) compiled by Bloomberg.

Control4 “would be a much better acquisition target than Nest,” Craig Irwin, a New York-based analyst at Wedbush, said in a phone interview. “It’s more easily monetizable. They have cool devices. They’ve already shown they can make money in that.”

Taulli said Control4 may sell for about $33 a share, a 33 percent premium to yesterday’s closing price.

“We believe focusing on delivering exceptional product and service performance will allow us to ultimately deliver value to our stakeholders,” Martin Plaehn, chief executive officer of Salt Lake City-based Control4, said in a statement, when asked yesterday if the company has considered selling or been approached by buyers.

Street Lights

Silver Spring, which went public in March, makes networking equipment for smart electricity grids and is expanding into street lights, where it helps operators improve energy efficiency and extend their lifespan.

The move into street lights “has a lot of promise,” and may help make the $747 million company a deal target, said Canaccord’s Quealy. Silver Spring’s shares are down 33 percent (SSNI:US) since the company said two weeks ago that fourth-quarter revenue may miss analysts’ projections. Sales for 2013 are now projected to be about $340 million, based on analysts’ estimate (SSNI:US)s compiled by Bloomberg.

“I immediately thought of Silver Spring when this announcement was made” about the Nest acquisition, Evercore’s McKechnie said. “They mainly help the utilities. The electric utility grid is pretty dumb. They do these automation systems, so different parts of the system can talk to each other.”

Noel Hartzell, a spokesman for Redwood City, California-based Silver Spring, declined to comment.

‘First Inning’

Because the advent of the Internet of Things is young, it’s largely composed of closely held startups such as Physical Graph Corp. and Dropcam Inc. While Control4 and Silver Spring have gone public in the last year, other public companies have reinvented themselves to capitalize on the market’s momentum.

One such company is San Jose, California-based Echelon, which has been publicly traded since 1998. Echelon, which makes chips and software that allow devices to communicate and control each other, has struck partnerships with companies such as chipmaker Marvell Technology Group Ltd. to provide more products for industrial companies. Echelon, with a market value of $134 million, may be a target, in part, because of its size, said Canaccord’s Quealy.

“We are very excited about our position for growth in the market,” Ron Sege, CEO of Echelon, said in an interview yesterday. “We are operating as a standalone company with a lot of potential.” He declined to comment on takeover speculation.

A buyer may pay $5 to $10 a share for Echelon, said Pavel Molchanov, an analyst with Raymond James Financial Inc. The shares closed yesterday at $3.09.

“As we get higher rates of adoption, the market potential becomes clearer, and that could lead to further consolidation,” said Steve Frankel, an analyst at Dougherty & Co. “Today, we are in the first inning. I think all of the major consumer-electronics brands will find a way to offer these capabilities. Everybody’s trying to get their toes in the water.”

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Nick Turner at nturner7@bloomberg.net


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