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Amazon Acquires iRobot: What You Need to Know

The e-commerce giant announced it is acquiring Roomba maker iRobot. Although Amazon is paying a reasonable price, the risks are high.

Amazon's  (AMZN) - Get Amazon.com Inc. Report customers might not be the only ones with a shopping addiction.

Just after announcing its plan to acquire health-care company One Medical  (ONEM) - Get 1Life Healthcare Inc. Report for roughly $3.9 billion, Amazon reported it is buying iRobot  (IRBT) - Get iRobot Corporation Report, the maker of autonomous vacuums.

Amazon will pay $1.7 billion in cash for the company, making it the e-commerce giant's fourth-largest acquisition so far.

But Amazon’s strategy goes far beyond wanting to sell vacuums. Critics of the deal claim that Amazon intends to use iRobot's algorithms to violate customers' privacy.

Here's what you need to know.

Figure 1: Amazon Acquires iRobot: What You Need to Know

Figure 1: Amazon Acquires iRobot: What You Need to Know

(Read more from the Amazon Maven: Amazon After Q2 Earnings: What the Analysts Are Saying)

A Premium or a Discount?

iRobot was founded by three members of the Massachusetts Institute of Technology's Artificial Intelligence Lab. Its robots were initially designed for military purposes. But in 2002, the company started to apply its technology to vacuum cleaners.

The company's expertise sets it apart from the rest. iRobot is known for having the best environment-scanning algorithms, which can be incorporated into Amazon products such as Astro and Alexa.

As expected, Amazon will pay a premium for the Massachusetts-based company. However, paying a premium doesn't always mean the deal is too expensive.

Amazon will pay $61 per iRobot share, a 22% premium over its $50 trading price before the deal.

Considering that iRobot's all-time high was $133 per share, I believe Amazon is paying a reasonable price, to say the least.

iRobot has been struggling to deliver bottom-line growth, because inflation has cut into its revenue growth and microchip shortages have trimmed its margins. But once these macroeconomic headwinds die down, iRobot should grow again.

Hardware and Software Synergies

The most obvious synergy here is verticalization: Amazon can favor Roomba and other iRobot products over competing robots in order to maximize iRobot’s revenues.

In addition, purchasing iRobot will enhance Amazon’s work in robotic hardware and software. Amazon has already been investing heavily on robotics through products such as Astro, Proteus, Cardinal, and Amazon Robotics Identification.

It appears Amazon is looking to evolve from an online retailer to an Industry 4.0 company, flooding the market with hardware products that can connect to each other through its proprietary software.

If Amazon is successful, it could create a barrier to entry for other manufacturers, because customers will likely prefer to remain in the Amazon ecosystem.

Will the Deal Go Through?

But not everyone agrees the iRobot deal is a good thing.

According to Ron Knox, senior researcher and writer for the Institute for Local Self-Reliance, the acquisition "may be the most dangerous, threatening acquisition in the company's history."

In an Insider interview, Knox acknowledged Amazon is acquiring an established market share. But he said the company will leverage its massive scale to the detriment of competitive fairness.

Also, the researcher believes Amazon could violate customers’ privacy by having access to the information contained in iRobot’s data sets.

As the deal has not yet been approved by the Federal Trade Commission, regulators might still terminate it due to antitrust allegations.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)