Google Inc (NASDAQ:GOOG) has officially announced the acquisition of Israeli social mapping company Waze for a price that has not been officially disclosed, but media reports have been talking about a figure in the area of between $1.1 billion and $1.3 billion. This looks like a defensive move, but a good defense is sometimes the best offense, and Google Inc (NASDAQ:GOOG) knows how to spot important trends in the tech industry.
Bidding for Waze
Waze is an Israeli social mapping company that has 47 million users generating maps and traffic data from their smartphones. Just like Google Maps, Waze produces mapping navigation reports from automatic data obtained from user´s phones, but the big difference is that Waze users engage actively in helping each other when it comes to traffic jams, police checkpoints, detours and those kinds of things.
Waze brings a social, collective, approach to mapping, this is not only more engaging and fun to use, it makes maps much more accurate since they are permanently updated.
There have been strong rumors about Apple Inc. (NASDAQ:AAPL) trying to acquire Waze in the past; TechCrunch reported that Apple offered $500 million for the company last year. Waze is already a data partner for Apple Maps, and the Cupertino company suffered a big setback with its maps fiasco, so adding Waze´s features and expertise could be quite valuable for Apple.
It seems like Apple Inc. (NASDAQ:AAPL) wasn´t willing to spend as much as Waze wanted though, and that was the main reason why negotiations didn´t advance further. Now that Waze has been acquired by Google Inc (NASDAQ:GOOG), Apple has lost a big opportunity to reduce the gap when it comes to mapping quality, and the company will remain dependent on Google Inc (NASDAQ:GOOG)´s tremendously popular mapping apps for its devices.
Facebook Inc (NASDAQ:FB) has attempted to buy Waze too; the social network reportedly offered $1 billion for the mapping company. But Facebook wanted to shutter Waze’s Israel-based research and development center and transfer several key employees to Facebook’s U.S. headquarters, and this was a deal breaker.
Facebook Inc (NASDAQ:FB) is in the midst of a transformation, trying to prove to investors that it can effectively adapt and thrive in the mobile computing paradigm. Waze could have been very useful when it comes to providing user´s location in order to better target mobile ads, which is a key factor in mobile advertising. Now it´s in the hands of Google Inc (NASDAQ:GOOG), perhaps Facebook´s biggest rival, and the clear leader in the online advertising business.
At a valuation of between $1.1 billion and $1.3 billion, the deal sounds too expensive for Google considering that Waze has 47 million users, 32% of them active. In comparison, Yahoo! Inc. (NASDAQ:YHOO) recently paid $1.1 billion for Tumblr, which has 300 million monthly active users, and even that deal was considered expensive by many analysts.
When different companies are after the same target, there is always the possibility of the price becoming excessively high, especially in tech where the value of a company or a technology is strongly dependent on unknown variables like future growth prospects, so things are quite complicated when it comes to estimating a fair price for an acquisition.
In the eye of the beholder
However, it’s one thing to estimate a fair valuation for Waze on a standalone basis, and a very different one to say how much the company is worth as a part of Google´s gigantic empire. It´s not only about the direct revenue that Google can get from Waze, Google needs to keep users inside its sphere of services to continue dominating the online advertising business, and mapping is a key variable in that equation.
Google is the undisputed leader in map services; it has far better navigation and traffic data than any other competitor. Buying Waze will strengthen its advantage over players like Apple and Facebook, which were also interested in acquiring the Israeli startup. Google Maps is already much better than the competition, and after the Waze acquisition it will become almost unreachable. It´s a defensive move, but a very powerful one.
Who is to say that Google, with more than $50 billion in balance sheet cash, shouldn´t spend something like $1.1 billion or $1.3 billion to secure its leadership in mapping? This is an area the company understands and dominates; maps will become increasingly more social and dynamic over the next years and Google will be in a position of strength to capitalize that trend thanks to the Waze acquisition.
Bottom line
When Google spent 1.6 billion for YouTube in 2006, most analysts said the price was too high for a company making no money in an area in a permanent state of change and innovation. That may have been true based on the information available at the time, but that´s precisely what visionary leaders do, seeing into the future what other people miss.
By consolidating Google´s leadership in mapping, the Waze acquisition could be another smart strategic move with powerful long-term implications for the company, and we may be able to fully appreciate that a few years from now.
Andrés Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google.
The article Why Google’s Bet on Social Mapping Is a Smart Move originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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