Investing.com — The tech market was shaken about a week ago when Reuters reported that Google's parent company, Alphabet (NASDAQ:GOOGL), was contemplating an all-cash deal to acquire customer management platform giant HubSpot (NYSE:HUBS), currently valued at around $35 billion.
According to the report, the tech giant had been in talks with Morgan Stanley (NYSE:MS), a potential advisor, to secure the needed financial structure and advisory to move ahead with the takeover.
What followed the report, however, was a period of silence from both parties involved, as analysts speculated that Google weighed the heightened regulatory risks associated with attempting such a takeover under the current administration's big tech regulatory framework.
Both companies declined to comment when consulted by Investing.com. "As standard practice, HubSpot does not comment on rumors or speculation. We continue to focus on building a great business and serving our customers," said a HubSpot spokesperson.
Now, as the days go by without any new developments, investors are beginning to wonder whether we'll see a happy ending at all — and, if so, when.
To better understand where we currently stand on the deal and what it would take to break it, Investing.com talked to several analysts in the financial and legal spaces, including the acting director of the White House Office of Science and Technology Policy who led the creation of the Biden-Harris administration's Blueprint for an AI Bill of Rights.
Why Google Wants to Acquire HubSpot
Despite the Cambridge, Massachusetts-based HubSpot's high valuation, experts argue that the deal could be highly beneficial for Google from a financial standpoint as it would bolster the giant's offerings in two key areas where it has been lagging: customer relations management (CRM) and cloud services.
Following last quarter's disappointing earnings report on the back of dwindling ad revenue, Alphabet CEO Sundar Pichai disclosed the company's intention to diversify its revenues further via takeovers.
"Google's heavy concentration in digital ad placement and search creates additional avenues for monetization of the digital experience, which a HubSpot acquisition could help create," explains Sandeep Rao, Senior Researcher at Leverage Shares. "The aftermath of the company's Q1 earnings release shows that Google could do with more revenue stream diversification," he added.
Vijay Marolia, managing partner and chief investment officer of Regal Point Capital, further explains the following financial logic supporting the deal: "HubSpot has fantastic fundamentals; revenue is growing at over a 20% clip, and EPS is growing at double that rate. Even better, cash flow is growing at over 60%," he told Investing.com exclusively. "That's why the market is paying over 90X earnings for each share of $HUBS. Compare that to Alphabet's multiple of 23, and this acquisition makes dollars and sense (pun intended)."
Moreover, experts agree that adding HubSpot's best-in-breed product lineup to Google's portfolio would significantly boost both companies' offerings, creating significant competition among the current industry leaders, Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN).
"Tying HubSpot into Google Cloud could provide Google with the differentiation and competitive edge it needs to compete against Azure and AWS, where Google lags the other two," Jay Jung, Founder and Principal of Embarc Advisors, told Investing.com.
Regal Point Capital's Marolia adds that the potential acquisition could also present another less obvious agenda in the data-collection space, which could help boost Google's position in the ongoing big-tech AI race. "HubSpot has unique information related to CRM, and it has collected data that will help machine learning models better understand and predict behavior," added the expert.
Sundeep agrees: "Since AI tends to be computationally intensive, there's plenty of scope for upselling Google's cloud services via HubSpot's AI-powered Content Hub."
Tech Dealmaking Subdued Due to Increased Regulatory Scrutiny
Despite the positive outlook for both companies on the financial side, breaking a deal with Google could be harder than ever under the current administration's big tech regulatory framework.
According to Dealogic data, tech M&As are back in vogue in 2024 after two years of subdued market activity due to higher capital costs and falling stock markets; the sector posted a 42% rebound in total deal value in Q1, buoyed mainly by the Synopsys (NASDAQ:SNPS)—ANSYS (NASDAQ:ANSS) $35 billion deal and Hewlett Packard Enterprise's (NYSE:HPE) buyout of Juniper Networks (NYSE:JNPR) for $14 billion.
But despite the seemingly positive outlook, tech has actually lagged the larger 59% rebound in total merger activity in the US during the quarter.
One reason is the highly restrictive stance in the US and the EU on big tech merger activity. In addition to the possible issues with Google—HubSpot, several other proposed mergers have crumbled due to perceived regulatory backlash.
Among the most prominent is NVIDIA's (NASDAQ:NVDA) attempted $40 billion acquisition of Cambridge, UK-based Arm Holdings (NASDAQ:ARM), which fell short following objections from regulators on both sides of the Atlantic.
In January this year, Amazon reportedly gave up on a $1.7 billion acquisition of iRobot (NASDAQ:IRBT) due to the EU's anticipated scrutiny. Similarly, late last year, Adobe Systems (NASDAQ:ADBE) was forced to abandon its planned $20 billion acquisition of Figma for similar reasons.
Including only the aforementioned deals, increased regulatory scrutiny over the last couple of years has halted over $100 billion in tech merger activity. However, the numbers could be much higher if we consider the large number of attempted deals that were never made public.
"The Federal Trade Commission (FTC) has been scrutinizing almost every deal that Big Tech undertakes, including smaller ones," explains Embarc Advisors' Jay Jung.
Biden Administration to Maintain Firm Stance on Tech Mergers
Consulted exclusively by Investing.com, Dr. Alondra Nelson - former acting director of the White House Office of Science and Technology Policy who led the creation of the Biden-Harris administration's Blueprint for an AI Bill of Rights - made it clear that tech regulatory scrutiny should remain high at least up until the elections.
"It is a good thing for the American public when the world's most powerful companies take pause to consider the broader implications of possible mergers and acquisitions, and it is a good thing for the American public that these companies consider regulatory responses as part of their calculus when weighing transactions that may be anti-competitive," she told Investing.com.
Dr. Nelson also added that "large, powerful companies should feel compelled to do due diligence when considering transactions that might trend toward monopoly."
Likewise, back in October last year, Biden introduced an extensive executive directive aimed at overseeing the advancement of artificial intelligence (AI). This move came in response to escalating apprehensions regarding its potential ramifications spanning from national security to public health.
Moreover, with increasing pressure from Democratic lawmakers such as Elizabeth Warren and Bernie Sanders for the current administration to adopt stricter tech laws in accordance with the ones currently in force in the EU, the administration's next move appears tilted toward imposing further restrictions on tech dealmaking activity.
What Would It Take for Google to Overcome Regulatory Hurdles?
The main argument supporting Google's bid is that it does not yet possess a significant market position in the CRM space, and thus, such a deal would not nearly constitute a monopoly-inclined move.
"Alphabet's biggest argument in trying to win favor from regulators is that HubSpot is a company/brand that doesn't immediately bring to mind a Google-based alternative close to size," explains Josh Tolley.
However, Jay Jung warns that the FTC has recurrently scrutinized even such cases. "The FTC has demonstrated that it is willing to take on cases where the anti-competitive nature may not even be directly apparent," the founder of Embarc Advisors told Investing.com.
Sandeep Rao also names other possible hurdles for Google: "HubSpot has a preponderance of small- and mid-sized companies as clients who use a variety of products and services rivaling Google's; this will give regulators plenty of fuel to deliberate." "For smooth sailing, Google must show that strong protocols are in place to ensure that its rivals' services will not be impacted. This will be hard to prove," he concluded.
Against this backdrop, some experts are pushing the deal's timeline all the way to 2025. "In a broken marketplace where investors are largely concerned about quarterly stock value increases as opposed to business-based returns, yes, the process will seem as if it is prolonged, but I would anticipate Spring of 2025," says Josh Tolley.
Jay Jung believes this scenario will lead to a prolonged bidding war among other companies with a smaller market position or private equity (PE) consortiums. "My anticipation is the other bidders, including PE consortiums, may emerge as viable contenders in the M&A bidding war for Hubspot. The board will have to weigh the price but also the certainty of close. So a PE-bidder may prevail as the winner."