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January 15, 2014

Google outspends top five rivals combined in move beyond Web ads

SAN FRANCISCO — Google, drawing from its $56.5 billion cash pool, is spending more money than five of its biggest U.S. competitors combined to buy into new markets as growth in Web advertising slows.

Including this week's announced deal to buy Nest Labs for $3.2 billion in cash, Google has spent more than $17 billion in the past two years to purchase hardware, software and advertising-technology companies, according to data compiled by Bloomberg. Apple, Microsoft, Facebook, Amazon.com and Yahoo have spent less than $13 billion in total to buy companies in the same period, based on deals with disclosed prices.

The spending blitz, which is mostly in cash instead of stock, underlines how Google is paying top dollar to expand its reach and acquire the talent necessary to push deeper into areas such as smartphones and Web-enabled gadgets. While Google has dominated Internet search, a business that generates billions of ad dollars each quarter, the company is seeking new revenue from other sources and turning to its cash hoard to provide an advantage.

"They're looking at what's next," Sameet Sinha, an analyst for B. Riley & Co. in San Francisco, said in an interview. "They're saying we're going to keep our cash for acquisitions."

Leslie Miller, a spokeswoman for Mountain View, Calif.- based Google, declined to comment.

Google's cash and equivalents jumped 24 percent from a year earlier in the third quarter to $56.5 billion, while net revenue increased by 5.2 percent to $11.9 billion. Google gets 84 percent of sales from Internet ads, even after diversifying into hardware and other areas.

Revenue growth slowed last year and is expected to do so again in 2014 based on analysts' estimates as more online activity shifts from personal computers to smartphones, tablets and other connected devices. That hurts Google's sales because mobile ads typically cost less and because search is less prominent on other devices. By 2017, PCs will account for 13 percent of connected-device shipments worldwide, down from 29 percent in 2012, according to researcher IDC. Tablets will make up 17 percent by 2017, and smartphones will account for 71 percent, IDC said.

Google's all-cash acquisition of Nest, its third biggest, gives the company a maker of smart thermostats and smoke alarms built by Tony Fadell, who previously helped Apple co-founder Steve Jobs create the iPhone. Fadell's co-founder Matt Rogers is also an Apple alumnus, as are at least 97 Nest employees, according to LinkedIn Corp. That's talent Google can put to use.

"They know from their Apple days how to scale something," said Rob Coneybeer, a partner at Shasta Ventures in Menlo Park, Calif., which was an early investor in Nest. "These guys are not just good startup designers who can work on a shoestring, but they know how to deploy and leverage lots of capital."

The Nest deal follows the June 2013 purchase of mobile mapping software maker Waze Inc. for almost $1 billion in cash, Google's fifth-largest acquisition. Waze provides social tools that Google can incorporate into maps, along with showing real- time road hazards and alternate routes. Facebook had been in talks to buy Waze before Google succeeded with its offer.

Google's biggest acquisition was its $12.4 billion deal for Motorola in 2012, which gave the company a smartphone maker along with a portfolio of wireless patents. It's all part of Google's recognition that the Internet is everywhere, with search and display ads making up just a piece of it, according to Frank Gillett, an analyst at Forrester Research in Cambridge, Mass.

"In this world of interacting with lots of different connected products, the integration of hardware, software and cloud service will be really important," Gillett said. "At some point, really good advertising starts to cross the boundary into assistance and advice."

Google later sold off a piece of Motorola for more than $2 billion to Arris Group.

Among top U.S. competitors, Microsoft has been the biggest buyer in the past two years after Google, spending about $9 billion. Most of that was on the pending $7.4 billion purchase of Nokia's handset unit and the $1.2 billion acquisition of business-software provider Yammer .

Facebook's biggest deal was mobile photo-sharing application Instagram Inc. for more than $700 million in 2012. The company was spurned in its effort last year to purchase mobile app Snapchat Inc. for $3 billion, a person with knowledge of the matter said in November.

Amazon's only notable deal in the past two years was for robotics company Kiva Systems Inc., which cost about $700 million. Yahoo's disclosed deals total about $1.2 billion, with most of that spent on blogging startup Tumblr last year.

Apple's spending amounted to less than $1 billion since early 2012, with about $350 million spent on fingerprint- technology company AuthenTec Inc. The company has been using its cash, which totaled $146.8 billion at the end of September, to placate shareholders like Carl Icahn, who are demanding greater returns. The company paid out $2.8 billion in dividends and bought back $5 billion of its shares in the fiscal fourth quarter.

While Google has resisted returning cash to shareholders, not all of its money is being spent on acquisitions. The company is investing internally on products like computerized Google Glass eyewear and driverless cars.

To bolster its experiments in robotics, Google acquired Boston Dynamics Inc. in December. The company, which makes robots for the Defense Department, will be part of a new product area led by Andy Rubin, former head of the Android software unit.

Gene Munster, an analyst at Piper Jaffray Cos., said Google will need to continue making "big bets" to move its leadership in search into new areas.

"They're trying to solve bigger longer-term problems, and to do that they need platforms," said Munster. "They're willing to pay up for those platforms."

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