The $7B Question: What Will Google Buy? –

Skype escaped, but that didn’t put a stop to speculation about which venture-backed company Google might try to buy with its growing war chest.

In mid-September, eBay snapped up VoIP service provider Skype for $2.6 billion in cash and stock. In the weeks leading up to that, a Google/Skype deal was the talk of the town, a rumor fueled by Google’s plans to sell 14 million class A shares in a secondary offering. Google completed the offering on Sept. 14, raising $4.2 billion. Add that to the nearly $3 billion in cash that Google already had in the bank and the company now has more than $7 billion to play with-on top of its extremely valuable stock, which is trading around $285.

Google won’t say what it plans to do with all that money. As much as VCs would like to see it buy some venture-backed startups, most say they believe Google is merely bolstering its cash reserves.

“I view Google’s action as taking money while you can and building a balance sheet to help in the future against Microsoft, [as opposed to] a major strategy shift implying that they are going to go on a buying spree,” says Tom Dyal, a founding partner of Redpoint Ventures.

Most of Google’s acquisitions to date-a long list that includes Web analytics company Urchin Software, 3D visualization software concern Keyhole, and mobile phone software developer Android-have been in the range of $10 million to $30 million.

Heidi Roizen, a managing director at Mobius Venture Capital, expects Google to stick with that strategy of absorbing smaller companies. “Google is much like Microsoft, which, for many years, even when it had the assets, didn’t make large acquisitions for customers or revenue, but rather made small ones,” she says.

But it’s not hard to imagine-given its cash horde-that Google has a big purchase in mind. Also, the company may feel pressured to do deals, lest its competitors snap up the best Internet properties. To wit, Yahoo forked over $1 billion for a 40% stake in China’s Alibaba.com in August, and a month earlier Rupert Murdoch’s News Corp. shelled out $580 million in cash for Intermix Media, which owns the popular social networking site MySpace. The Intermix purchase is one of several by News Corp., which has set aside $2 billion for Internet acquisitions to challenge Google and others with a digital network of its own.

“The big are getting bigger,” says Raj Kapoor, a managing director at Mayfield, noting that a more ambitious Google strategy “is something to consider.”

BA Ventures Managing Director Sharon Wienbar doesn’t believe Google has a specific acquisition in mind, but she says: “If they were to do a major acquisition, it would have to be with cash, which makes the [secondary] stock offering sort of interesting. Because of corporate governance issues, and Google’s unique corporate culture, I can’t imagine that they would [make a major purchase] via stock.”

VCs have distinct ideas about where Google might shop next, regardless of how big the purchase.

Wienbar points to Google’s move in late August to begin selling print ads, whereby it purchased ad pages in Maximum PC and PC Magazine, then sold the pages in parcels to nine small businesses. Its apparent plan is to extend its already omnipresent brand and its online ad revenue model while helping small businesses get exposure in the offline world. “I could easily see them wanting to get into other ad networks beyond just optimized technology ads,” Wienbar says.

Wienbar also contemplates a “cross-border merger” that would enhance Google’s data content. “Google’s mantra is: We help you find everything. Who knows? Maybe it would make sense for Google to add a big information store, like a giant credit bureau like an Experian or even an Axium,” which handles payroll and workers compensation for the entertainment industry. “The idea is for it to buy pools of other people’s content.”

Mayfield’s Kapoor posits that Google is probably looking at two areas right now: vertical search and entertainment. “Google is comprehensive, but it may not have the answers you need,” he says. “Buying domain expertise that Google doesn’t necessarily have could make for some really good acquisition opportunities.”

Possible targets in vertical search include Jobster, an online recruiting service, and Classified Ventures, a media portal that owns Cars.com and Apartments.com.

On the entertainment side, Kapoor envisions Google acquiring “an aggregator of media, along the lines of what MySpace is doing.” He adds, “Google has [social networking service] Orkut, and Google video search and many other media applications in play at their labs, but not everything [being developed in-house] will take the world by storm.” One potential purchase: social networking directory TheFaceBook.com, backed by Accel Partners.

Roizen says she wouldn’t be surprised to see Google “perhaps reach abroad and cover key territories with emerging leaders native to those areas,” including, invariably, China. Google has said it plans to open a product R&D center in an undisclosed region of China this fall. It has also retained the services of three large Chinese firms-China Enterprise, Hotsales and China Source-to represent its AdWords advertising for its Google China site.

Tod Francis, a managing director at Shasta Ventures, says if Google is planning acquisitions its targets may include “hobbyist and photo-sharing websites, RSS and video feeds, video search, social networking.” A potential candidate in that sector: Feedster, a syndicated content search engine backed by Selby Venture Partners. Another that might make sense is video compression startup DivX Networks, which has attracted funding from Draper Atlantic, Draper Richards, Samsung Ventures America and others.

Francis adds that VoIP, which Google recently added to its new instant messaging application, “is a natural extension of Google’s business. Google is the cornerstone of people’s online communication; naturally, they want to be the cornerstone of their voice communication, as well.”

Google is clearly interested in VoIP. Danny Rimer, a partner of Geneva-based Index Ventures (one of Skype’s three venture backers) confirmed that Google and Skype had talked prior to the eBay/Skype deal, but he says the discussions were about “nothing in particular.”

With Skype out of play, residential VoIP service Vonage is a possible Google target. Another possibility is Stoke, a 1 1/2-year-old startup backed by Kleiner Perkins and Sequoia Capital (which also backed Google). Stoke is in stealth mode, but its website says that it’s “focused on designing and manufacturing a new category of service delivery infrastructure that enables fixed-mobile convergence supporting any service over any infrastructure using an end-user device,” which sounds like VoIP.

Email: Constance.Loizos@Thomson.com