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Eight Large Acquisitions Recommended for 2017

Posted on Thursday, Dec 15th 2016

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We recently looked at the five horses in tech: Google (Alphabet), Apple, Facebook, Amazon, and Microsoft who are fighting for dominance of Techdom. Let us now look at some large acquisition prospects that can shake up the odds in the race.

Amazon and Pinterest

With six straight quarters of profits, Amazon (NASDAQ: AMZN) has shaken out doubts about its ability to run a profitable business. It has seen great success with AWS, which accounts for the bulk of the profit. Amazon has decimated most of its competition in the e-commerce space. Amazon has recently launched a revamped and expanded version of a Pinterest-like feature called “Interesting Finds” which offers shoppers a curated feed of products across a number of categories.

In this space, a good acquisition prospect for Amazon could be Pinterest, which is struggling to monetize its more than 150 million monthly users. It is expected to triple its revenue to $300 million in 2016. Pinterest hopes to reach $2.8 billion in revenues by 2018 and grow its active user base to 329 million by 2018. It has raised $1.3 billion in funding. Its last round of funding was held in May 2015 when it raised $186 million at a valuation of $11 billion. It has ruled out an IPO any time soon. However, investors will be looking for an exit, and if Amazon wants to buy them, they will sell. Valuations in 2017 will go south, so this may be an interesting acquisition for Amazon to consider. The users are highly engaged, and a deeper integration with Amazon’s e-commerce engine could make the monetization model much more lucrative. The highly unprofitable, $300 million-revenue Pinterest is overvalued right now. Even with its cash balance of $13.6 billion, I don’t think it’d pay $11 billion. $3-$4 billion is a reasonable valuation.

Apple and Netflix

We have had some exceptionally well-designed products from Apple (NASDAQ: AAPL) over the years, although recently, the brand is making a lot of mistakes. Its revenue streams are now slowing down and it needs to relook its strategy. What is the next major category that can deliver serious growth?

There are obvious synergies with Apple TV on which Netflix is one of the most popular channels. Apple TV is a product line that has huge potential, but without its own content Apple will see declining revenues here as well. With a Netflix acquisition, Apple can provide a proprietary content service integrated into the Apple TV. And by offering proprietary content integrated into iTunes and Apple TV, Apple can leverage its user base and invigorate its Apple TV offering.

My main observation is that Netflix has developed good expertise in developing original content that is generating hit after hit. If Apple buys Netflix and really develops this angle, and integrates Netflix with a superior user interface on Apple TV, this combination would inject energy into both hardware sales and content-driven subscriptions.

Also, Netflix video-streaming app is now the top-grossing iPhone app in Apple’s App Store. It offers in-app purchases in the program, allowing users to sign up for the service or add the ability for multiple users to watch its content on the same account. Netflix is estimated to generate nearly $2.9 million a week in net revenue from its iPhone app. Apple typically takes 30% of revenue generated from the sale of an app or in-app content, but for subscription-based apps of an auto-renewing subscription, the company takes 70% the first year and 85% in subsequent years.

Netflix’s stock is trading at $123.44 with a market capitalization of $53.4 billion. Apple ended the year with $20.5 billion in cash and equivalents while it has assets worth $321.7 billion.

Facebook and eBay

Facebook (NASDAQ: FB) is the undisputed king of social media. And it has made some noteworthy acquisitions like WhatsApp and Instagram to get there. Facebook, Whatsapp, and Facebook Messenger have more 1 billion active users while Instagram has 500 million users. It is clearly a winner in mobile advertising, and now it has set its sights on e-commerce.

It has recently launched a service called Marketplace that will allow users to buy food, get movie tickets, get quotes from local businesses, and request a service appointment. Analysts expect that the service will pose a threat to eBay and Craigslist.

An interesting acquisition to support its e-commerce initiatives would be eBay (NASDAQ: EBAY) itself. Facebook has recently partnered with eBay to leverage its technology to launch a shopping service on the Messenger app. ShopBot is a personal shopping assistant that will help consumers zero in on the best deals on eBay. Users will also be able to submit a photo of the product they are looking for and the bot will find similar items on eBay for sale. The partnership will help eBay reach out to the billion plus members for Facebook Messenger. eBay’s stock is trading at $29.8 with a market capitalization of $33 billion. Facebook ended the third quarter with assets worth $59.7 billion and cash and short-term investments of $30.3 billion.

Alphabet and Twitter

For a long time, Google aka Alphabet (NASDAQ: GOOG) was synonymous with search and then it went on to dominate mobile. It went on to command the same kind of following for its other ventures. It has seven services with more than 1 billion users – Android, Search, Chrome, Maps, Play, YouTube, and Gmail. Of late, it has been focusing its efforts on the Cloud and the monetization of YouTube. Last year, YouTube accounted for an estimated $9 billion in gross revenue. Analysts project it could reach $27 billion to $28 billion by 2020.

Facebook and Snapchat have begun to challenge YouTube’s dominance in video. Alphabet should consider acquiring Twitter (NYSE: TWTR), which has made forays in live video. It has been expanding its content portfolio by building on the video streaming services. As part of this effort, Twitter has entered into deals with the National Basketball Association, CBS News, Bloomberg TV, among others, to stream exclusive content. Twitter is confident that the streaming service will be well liked given that the Tweets on these streams are able to connect the audience more closely. Twitter is better tuned into its audience and this is where it can help YouTube.

Analysts believe Twitter could serve as not only a distribution arm but also an improved social layer for YouTube amid increased competition in the world of mobile video from both Facebook and Snapchat. Twitter could also help it gain traction in social media, an arena in which Google never really made a mark.

In September, Twitter had engaged Goldman Sachs to help plan a sale but its anemic user growth rates, losses, and toxicity have been hampering its buyout prospects. From about $40 billion a few years ago, Twitter’s market cap has plunged to about $13.8 billion while Alphabet has a cash balance of $80 billion.

Microsoft and the Cloud

With the $26.2 billion acquisition of LinkedIn, Microsoft has made a big splash on the social side. But now it needs to cement its position in its endgame which is cloud. Some prospects would be IT service management company ServiceNow (NYSE: NOW) trading at market cap of $13.2 billion, business intelligence and analytics company Tableau (NYSE: DATA) trading at a market cap of $3.3 billion, data analytics software solutions provider Splunk (NASDAQ: SPLK) trading at market cap of $7.9 billion, and SaaS-based enterprise application services provider Workday (NYSE: WDAY), which is trading at a market cap of $14 billion. All these are very much within the reach of Microsoft, which ended the recent quarter with $136.9 in cash and short-term investments. If Microsoft spends about $45 billion to buy all four, they become a formidable force in Cloud. And if LinkedIn’s data is strategically integrated into Dynamics and Workday, it would make it THE force to reckon with in the cloud universe.

Exciting possibilities, and with tons of spare cash, each of these five tech leaders can really beef up their games.

Photo Credit: Paul/Flickr.com

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