Will Google Buy iRobot?

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Make no mistake about it, Google (NASDAQ: GOOG) is going to be one of the largest suppliers of robotics in the world. Currently the company is working on producing driverless technology, automobiles that run purely on software, eliminating the human error from driving, freeing us up to do other things (I have written two columns elaborating, Part I and Part II.) Whether or not they ultimately create the hardware (cars) for it is another still-developing story, but the software is a certainty, and already being deployed on the roads.

Furthermore, it is no coincidence that Google has a rather large division called "Android." Bet your bottom dollar, as I have, that Google will at minimum be developing software for other robotics.

In an effort to spur this growth, I have a suggestion for Google officials (Larry, Sergei, Eric are you listening) -- buy iRobot (NASDAQ: IRBT).  

iRobot was founded by guys from MIT (meaning that the egghead cultures are likely to get along well) and currently trades well below its 2006 IPO price. Since that time the company has expanded beyond household robotics (including the Roomba) into both military robotics and a healthcare bot, which just recently gained FDA approval to be roaming the halls of hospitals around the nation.

Taking a look at iRobot’s balance sheet, there is zero debt, a market cap just south of $600 million. The company has had generally positive cash flow, though it did acquire Evolution Robotics last year for $74 million, and it wound down its defense and security system because of cutbacks in defense spending, which affected the bottom line, the latter leading to a fourth quarter loss.

Additionally iRobot has a wonderful patent portfolio that I don’t believe is fully valued by the market.

How Google Benefits iRobot

Honestly, I believe that iRobot is undervalued, the stock has no froth. How often do you hear people mention the stock in the same breathless way they might Apple, or Google for that matter?

iRobot’s Roomba has been around 10 years, but they have done very little to market their product to the masses or even to build brand awareness. Although they have made small strides in this area, at least marketing to Patriot fans at the games and creating a series of short “sitcoms” (watch a 50-second one) about iRobot products cleaning the house of one of New England’s starting linemen, Vince Wilfork, which actually I found strangely effective.

Now, I am all in favor of conservative shareholder balance sheets with zero debt, but this has to be balanced by by some risk of investing in marketing campaigns that will lead to sales and greater brand awareness, especially when you are first to market, as iRobot was with the Roomba. There is just too great an opportunity here.

Enter Google: deep pockets, great marketing department, and more traffic than anyone else in the world. Plus the brand name. Affixing the Google logo to an iRobot product will help ease the internal mental friction to buy for many familiar with the caliber of Google software products (which keep getting better and better).

How iRobot Benefits Google

First of all, all my financial analysis says iRobot's stock is cheap (which is why I am long.) Google can buy a cash-producing company and all its patents and relationships for a premium of the stock’s current worth, and for less than 2% of cash on hand (assuming a $1 billion sales price). Additionally:

  • Google’s brand makes iRobot’s brand stronger (synergy);
  • there can be cuts made in the redundancies of the operation of the companies (synergy);
  • Google’s marketing expertise can work for the new iRobot division, which they had been lacking in (synergy);
  • Google gains access to potentially more government contracts via iRobot’s connections, which Google has always sought (synergy); and
  • iRobot’s know-how in building robotics, plus all their other intellectual property.

To quote Jack Donaghy (Alec Baldwin’s “30 Rock” character), “Don’t ever bad-mouth synergy.”

Looking Forward

I am just an investor trying to forecast the future. Based on the fact that Amazon paid $775 million for Kiva Systems, which creates tiny robots that make warehousing more efficient (an investment that will raise the company's margins long term), I believe that iRobot might be a tasty target for someone out there. And my hope is I might have laid out some of the synergies the company might have with Google. Don’t ever bad-mouth synergy!

 


margiecfl owns shares of Google and iRobot. The Motley Fool recommends Google and iRobot. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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