Google’s recently announced second quarter results surprised the market by exceeding expectations and at the time, caused a raft of analysts jumping to upgrade their stock price targets and ratings on the stock. New Chief Financial Officer, Ruth Porat, has taken some of the credit for the improved market sentiment because her reputation is to be very much in control of costs and business expenses. It’s true that Google appears to have a better handle on internal spending and cost control, however this is also true on a wider scale: there is another reason why Google’s earnings and revenue were ahead of expectations and that is there were fewer acquisitions. Google is spending less on both the big ticket items – other businesses – as well as in the recruitment side of things. Google still has $70 billion in cash, which is an impressive war chest for ongoing acquisitions.
To put things into perspective, for the first half of 2015 Google spent $149 million on acquisitions and asset purchases. This is not a small sum, but let’s compare this with the first half of 2014, where Google spent $3.5 billion. Now, admittedly, this sum is somewhat bloated by the $2.5 billion acquisition of Nest Labs, the smart thermostat and smoke detector manufacturer, but even after stripping this out, Google spent around one sixth on acquisitions for 2015 compared with 2014. if we go back two years to 2013, Google spent around $1.3 billion, which was almost a billion dollars for Waze and $344 on another fifteen companies. Google has slowed down buying up other business, presumably to give the enlarged business time to adjust to the new structure. We have seen the company do something of a consolidation effort with internal research and development spending, which was up by half a billion dollars over the period and most of this was spent into data centers, salaries and stock. There are no signs that this internal development is going to slow down: Google’s plans to redevelop a power station into a data centre is positive, plus Google is busy incorporating OpenStack compatibility into its cloud platform, with all of the associated benefits and appeal for businesses large and small.
Perhaps we will see a period of somewhat more prudent investment in buying external companies and instead a refocus on Google’s current and soon-to-be core businesses? Google recognize the value of this as in the words of Ruth Porat, “To date, the biggest return on investment here has been in our core search business including mobile search, as a result of both smart M&A [mergers and acquisitions] and capex [capital expenditure].” In other words, buying the right company to integrate into the business, and ensuring that the existing business is sufficiently funded and developed. Although it may seem a glib statement, Google as a business is showing signs of gracefully maturing.