Rumors emerged (again) on Thursday that Alphabet (GOOGL +2.53%) (GOOG +2.92%) is making progress in talks to acquire customer relationship management (CRM) specialist HubSpot (HUBS 4.44%), according to a report by Bloomberg. The discussions appear to have advanced to the point the pair are talking terms.
It's clear that the rumored talks -- if they're happening at all -- are still in the early stages. However, if such a deal were to come together, it would mark the largest acquisition in Alphabet's history.
Let's take a look at what's at stake and what it means for investors.
Image source: Getty Images.
An intriguing acquisition target
It's easy to see why Alphabet might be interested in HubSpot. From its humble beginnings pioneering inbound marketing, the company has expanded its offerings to include a full suite of integrated customer relationship management (CRM) tools, which include marketing, sales, service, content management systems, and operations.
That expansion strategy has been wildly successful. In 2023, despite the macroeconomic overhang, HubSpot grew revenue by 25% to $2.2 billion, driven by subscription revenue that climbed 26%. It's always a plus when recurring revenue grows faster than overall sales, as it sets a firm foundation for future growth. The company isn't yet profitable on a GAAP basis, thanks to its ongoing product expansion and heavy spending on research and development, which amounted to 28% of HubSpot's revenue last year. On the plus side, it generated operating cash flow of $351 million in 2023, suggesting that profitability is merely a matter of time.
HubSpot also cleared a couple of important milestones to close out last year. The company's recurring subscription revenue exceeded $2 billion for the first time, while its customer base surpassed 200,000, a remarkable achievement for a company that's less than 20 years old.
If Alphabet were to acquire HubSpot, it would help the Google parent expand beyond its primary enterprise customer base, giving it access to a greater number of small and medium-sized businesses (SMBs). Furthermore, cultivating relationships with smaller companies earlier in their growth trajectory might result in greater future demand for Google Cloud, which has been among the fastest-growing major cloud services over the past few years.
That, combined with HubSpot's track record of success, helps illustrate why Alphabet might be interested.
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Where there's smoke, there's fire?
This marks the second such report by a major news organization. Early last month, Reuters reported that the Google parent was considering "making an offer for HubSpot," citing "people familiar with the matter." The report noted that Alphabet had met with investment bankers to discuss the size of any potential bid and whether the proposed tie-up would pass muster with regulators.
When considered in the context of today's report, it increases the likelihood that these discussions are taking place. However, that doesn't necessarily mean that an agreement will come to fruition, as there are many moving parts in a deal of this magnitude.
Speedbumps along the way
First is the price. HubSpot stock closed at about $590 per share on Wednesday. The company closed out the first quarter with roughly 51.5 million diluted shares outstanding, giving HubSpot a market cap of nearly $30.4 billion.
Investors would likely scoff at any deal that didn't include a significant premium, particularly given the stock's stellar performance. Since HubSpot's initial public offering (IPO) in October 2014, the stock -- which was then priced at $25 per share -- has gained 2,260%. The gains were fueled by revenue that has increased by 2,780%, and while it isn't yet profitable, analysts expect the company to cross that threshold this year.
Given its impressive gains, it wouldn't be unusual for the deal to command a significant acquisition premium -- an amount that's added to the total purchase price to reward current shareholders and get them to approve the deal. The average long-term buyout premium runs about 30%, but buyers have been conservative about paying up in the face of macroeconomic headwinds and higher valuations. That would put the value of such a deal as high as $40 billion, making it the largest acquisition in Alphabet's history, easily eclipsing its $12.5 billion buyout of Motorola Mobility in 2012.
Finally, if Alphabet pursued such a deal, it could attract the scrutiny of regulators, who have been reluctant to give mega-deals like this a pass. On the other hand, since the business is so far removed from Alphabet's core operations, there's an argument that antitrust concerns wouldn't apply here. Furthermore, with Salesforce as the undisputed leader in CRM, it could address anticompetitive questions that might be raised.
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What it means for investors
If Alphabet is indeed courting HubSpot, what does it mean for investors? Currently, it doesn't mean anything, as neither company has confirmed or denied the existence of acquisition talks. This could simply be because it's just a rumor, or it could be because they don't want to scuttle any potential deal by confirming the talks.
As a longtime HubSpot shareholder, I hope the companies don't reach an agreement. I added to my position numerous times over the past several years, as I think HubSpot has a long and profitable runway ahead. The company is chasing a total addressable market that management believes will grow from $51 billion in 2023 to $77 billion by 2028.
I'd much rather see HubSpot go it alone and be wildly successful than be swallowed up by a tech titan like Alphabet. For full disclosure, I'm also an Alphabet shareholder, so I expect to win either way.
