On November 1, Fitbit (FIT) agreed to be acquired by Google (GOOG) (NASDAQ:GOOGL) for $7.35 per share, or about $2.1 billion on a fully diluted basis. As many readers on Seeking Alpha already know, I have been a long-term bull on FIT for the past two years and have been accumulating a position throughout that time.
FIT comprises the largest position in my portfolio currently and my average cost is around $4.30 per share. Despite seeing a nice appreciation already, I’m not going to take my gains and will continue to hold onto FIT. There are two principal reasons that I’m not selling my shares yet: (1) I believe FIT is worth more than $7.35 per share and I see a significant possibility of another bidder entering the fray and (2) for tax reasons – specifically, I’d like the shares that I bought earlier this year to switch to long-term capital gains.
Although Fitbit and Google did agree on this deal at $7.35 per share, it is far from certain that the deal will ultimately proceed at this price, or at all. The market has some skepticism that it won’t proceed, which is evidenced by FIT’s closing price on Friday of $7.14 per share.
In the merger agreement, it notes that it is subject to several closing conditions. Typically in an acquisition, the largest unknown item is whether or not the target will receive shareholder approval to proceed with the deal. However, given FIT’s large insider ownership, coupled with its super-majority voting structure, it appears that it will not be difficult for FIT to get the requisite majority of the aggregate voting power of the outstanding shares to approve this deal.
The largest impediment that I see in getting this deal done at this price is that I believe another bidder will enter the fray. Although FIT agreed not to actively solicit competing bidders in the merger agreement, FIT did not agree not to hear out other offers that are presented to them; if it had agreed to that, it would have been a breach of its fiduciary duties to shareholders.
It was already reported that Facebook (FB) held talks to acquire FIT, but apparently their offer did not top Google’s. However, my guess is that FB was more concerned about the public outrage that would accompany news of FB acquiring FIT; FB already has enough problems on Capitol Hill regarding data collection policies. Given the large active user base of around 28 million users, coupled with strong partnerships, a vast collection of health information and strong brand value, I see a few other possible suitors: CVS Health (CVS), Microsoft (MSFT) Amazon (AMZN), Under Armour (UA), Lululemon Athletica Inc. (LULU), among others.
FIT agreed to pay Google a termination fee of $80 million should FIT accept a higher offer. That is a relatively small figure (and about market for the size of the deal) which shouldn’t deter other possible suitors from entertaining offers.
Another closing condition is that all regulatory authorizations be received, including the applicable waiting periods under the HSR Act expiring or being terminated. Google appears pretty confident that it’ll be able to get through regulatory hurdles and agreed to pay FIT $250 million if the deal falls through due to antitrust issues.
However, so far, two members of Congress, from both sides of the political aisle, have already expressed concerns. Republican Josh Hawley tweeted, “Why should Google be permitted to acquire even more companies while they’re under DOJ antitrust investigation?” Democrat David Cicilline also accused Google of “. . . threatening to further entrench its market power online.” Given that Google was already under antitrust investigation by fifty US states for potential monopolistic behavior, I expect this transaction to receive close scrutiny by regulators and regulatory approval will definitely be the long pole in the tent to getting this deal done.
As Bloomberg has previously reported, two prior Google acquisitions took eight and nine months to receive regulatory approval, the DoubleClick deal in 2007 and the ITA Software deal in 2010, respectively. With regulators being hyper-focused on data protection recently, I would expect that this transaction would take longer to gain regulatory approval. One scary scenario that I’m sure regulators will consider is imagine how much information Google could glean by coupling its search and other data on users gathered through its various products with location and health data from a smartwatch.
In its press release for the deal, Google promised not to sell personal information to anyone and not use Fitbit health and wellness data for Google ads. However, a promise in a press release doesn’t mean too much, especially for a profit-focused company. Perhaps regulators will condition the transaction on Google signing an agreement to follow these promises, with some teeth for non-compliance.
Ultimately, as a shareholder of FIT with a cost-basis around $4.30, I’m happy to get a bit of a return. However, I also think FIT is being undervalued, given its cash balance of roughly $700 million, its recent pivot towards a subscription business model and potential to receive FDA clearance for sleep apnea detection and ECG.
This deal is far from cemented and I’m continuing to hold my shares, as I think other bidders could enter the fray and if the DOJ or FTC does not give this deal a blessing, FIT will receive a nice sum of $250 million from Google. So I don’t think there is too much of a downside risk. It’ll be interesting to see what happens with this deal and either way this shakes out, I believe it’s a positive for FIT shareholders.
Information from this article was originally published on my exclusive marketplace service, Invest with a Stacked Deck.
Disclosure:I am/we are long FIT.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.