By Chris Leung and Lukas Bruell (University of Warwick) - Date: 24/11/2019
Overview of the deal
Acquirer: Google (NASDAQ: GOOG)
Target: Fitbit (NYSE: FIT)
Estimated value: $2.1 bn
Announcement date: 1st November 2019
Acquirer Advisors: NA
Target Advisors: Qatalyst Partners
The emerging trend of wearable devices in recent years has been a revelation as a growth catalyst for the technology industry that saw Apple’s wearables revenue increasing by 54% Y-O-Y in Q3 2019. Although Google already has Wear OS – its in-house operating system for wearable devices – and Google Fit, the internet company has sought to integrate its software onto hardware products.
The structure is an all-cash deal that sees Google paying $7.35 per share – a 19% premium to Fitbit’s closing price on 31st October, valuing Fitbit at $2.1 billion on a fully diluted equity value base. Google’s offer seems a bargain to Fitbit’s $20 IPO price in June 2015, closing at a high of $47.49. However, the healthtech company is in dire need of stimulus with revenues stuck between the $1.4 - $1.5 billion range over the past three years. The acquisition will improve Google’s competitiveness in the health and wellness sector especially if core elements of Google Fit can be integrated together with Fitbit’s fitness tracking features.
“With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster and make health even more accessible to everyone,” - James Park, Fitbit Co-founder and Chief Executive
Company Details (Google)
Google is a technology company that dominates the internet-related industry, specialising in online advertising, search engine, cloud computing, software and hardware. Google has increasingly diversified beyond its core search engine into hardware and other ventures.
- Founded in 1998, headquartered in California, United States.
- CEO: Sundar Pichai
- Number of employees: 98,771 (2018)
- Market Cap: $906.96B - EV: $804.57B
- LTM EV/Revenue: 5.19x - LTM EV/EBITDA: 18.26x
- LTM EV/Revenue: 5.19x - LTM EV/EBITDA: 18.26x
Company Details (Fitbit)
Fitbit is a pioneer in the wearables sector producing wireless wearable devices that gather data and metrics on activities involved in fitness. The company has since sold more than 100 million devices with 28 million monthly active users on their Fitbit OS that delivers personalised insights to help reach health and fitness goals.
- Founded in 2007, headquartered in California, United States.
- CEO: James Park
- Number of employees: 1,694 (2018)
- Market Cap: $1.74B - EV: $1.35B
- LTM Revenue: $1.5B - LTM EBITDA: -$129.06M
- LTM EV/Revenue: 0.90x - LTM EV/EBITDA: -10.44x
Projections and Assumptions
Short-term consequences
According to Statista estimates, the healthcare technology space is potentially worth $24 billion by 2020 and Google’s parent Alphabet has already demonstrated strong ambition to capitalise through its Verily Life Science research organisation and biotech spin-off Calico. Where Google will realise most near-term synergies from is in Fitbit’s healthcare ties with insurance companies, its partnership with BMS-Pfizer Alliance to ‘accelerate detection and diagnosis of atrial fibrillation’ and even the Singaporean government’s endeavour to provide customers, employees and citizens with fitness trackers. Interestingly, Google and Fitbit have previously announced a partnership intending to utilise Google’s Cloud Healthcare API to integrate Fitbit’s health and fitness data into medical records, thereby facilitating the bridge between data and doctors.
Despite Google’s presence in the healthcare sector, there have been few developments by way of pushing healthcare as a viable business venture and the acquisition is indicative that it recognises the ceiling it has hit in becoming a healthcare vertical contender without a consumer engagement strategy. With Fitbit boasting 28 million active users, collecting data over step counts, heart-rate readings, sleep time, menstrual cycles, location and other non-health personal information, the most obvious lure is data to further build up its profile fundamentally as an advertising company. Considering the purchase price and MAU, Google has essentially acquired valuable data for roughly $75 per person and there is undoubtedly potential to become a one-stop shop for AI-generated health insights. Yet more notably, both Google and Fitbit have emphasised that health and wellness data will not be used for Google ads, which suggests that data would instead be used to enhance Google Assistant efforts – an important synergy for both the short and long term horizon.
Long Term Consequences
Yet, data is not the endgame for Google who strives to make deeper inroads into the wearables technology space with Forrester Research forecasting smartwatch sales to surpass that of fitness trackers by 2020. The emergence of wearables over the recent few years presents a unique opportunity to create more personalised and tailored internet services through seamless interaction between devices and experience when accessing applications. Google has historically opted to focus on developing its foundational software, partnering with the likes of Samsung, LG and Motorola to showcase Wear OS; and the acquisition finally makes the possibility of seeing a Pixel smartwatch all the more likely.
If Fitbit’s hardware is nothing out of the ordinary, and has a faltering software, this begs the question: what has Google purchased? The unfortunate truth is patents and engineers – Fitbit has a number of patents related to fitness tracking and wearable technology which would accelerate Google’s pursuit of a smartwatch – providing a meaningful offset to a maturing smartphone market. Additionally, being under Google’s arm will present a significantly healthier balance sheet with which Fitbit will enjoy more financial flexibility to focus on product development as opposed to profitability alongside a fundamentally more capable OS platform.
On the other hand, Fitbit has found itself locked in stagnation, losing money almost every quarter since going public in 2015. Despite being able to grow its MAU (slowly) over recent years, the company is being bombarded with competition from premium players in Apple and Samsung to Xiaomi, Huawei and generic trackers in the budget space. Moreover, the recent introduction of a Fitbit Premium subscription service marks a transition away from low-margin, commoditised hardware to a business model with a stream of recurring subscription revenue.
Ultimately, the acquisition is mutually beneficial; for the most part, Google has struggled to make an impact in the wearables category despite investing in its proprietary development on top of bolt-on acquisitions such as the $40 million purchase for IP and personnel from Fossil Group’s R&D Team. But as Google found out in religiously building out its software capabilities and Fitbit in hardware, it is difficult to compete in the wearables category without being able to provide the full package. With smartwatch sales revenue expected to double to $34 billion by 2023 coupled with the fact that revenue in Google’s search and advertising operations have decelerated, wearables seems a reasonable point to start. There is also a sense of familiarity with the deal, looking back at Google’s purchase of HTC in 2017 for $1.1 billion, which kickstarted production of the Pixel smartphones. Spending $2.1 billion on a speculative investment is a drop in the bucket for a company with $121 billion in net cash, and represents somewhat of a bailout for Fitbit who is rapidly losing relevance.
Risks and Uncertainties
Perhaps the largest and most prominent risk would be regulatory scrutiny for potential antitrust violations. Fitbit is Google’s largest acquisition in consumer electronics since its $3.2 billion deal for Nest in 2014, which could add fuel to ongoing investigations centred on the company’s search and advertising dominance. How consumer data will be used has largely remained unclear – while Google has issued a statement explicitly stating that data will not be used for Google ads, Nest issued a similar statement upon announcement of Google’s takeover, but after being fully integrated into Google’s ecosystem, such promises that “data does not go into the greater Google or any of [its] business units” have since been broken. Regardless, it took approximately 5 years to reach that point, and it would be a waste if Google violates its promise in Fitbit before pushing out a competitive smartwatch. As a means of reflecting the heightened risk of regulatory intervention, Google has agreed to pay Fitbit a $250 million termination fee if antitrust blocks approval for the deal.
Another sticking point to the deal would depend on how effectively Google is able to merge both Wear and Fitbit OS in a cohesive manner. The issue is that Fitbit avoided using Wear OS and opted to purchase Pebble and built Fitbit OS from the ground up. Forgoing Wear OS meant Fitbit doesn’t need to sacrifice autonomy and adhere to the platform’s limitations – it was for this reason that Fitbit was able to build a smartwatch with a 5 day battery life, achieve a form factor that is more adaptive to fitness and control what compromises were to be made. This in turn means none of Fitbit’s existing hardware technology is capable of running Wear OS – at least not to the same effectiveness and similarly, Fitbit OS cannot power Wear OS hardware either.
“We will never sell personal information to anyone. Fitbit health and wellness data will not be used for Google ads. And we will give Fitbit users the choice to review, move, or delete their data.” - Rick Osterloh, Google Senior Vice President, Devices & Services