Skip to main content

It may be high time for Alphabet Inc. (GOOGL) - Get Alphabet Inc. Class A Report to make an acquisition. 

Like many of its Silicon Valley peers, the Google parent company has built up a massive war chest of cash that could be prime ammunition for M&A. As of the end of the second quarter, Alphabet had $94.7 billion in cash and marketable securities, of which 61%, or $57.9 billion, is held overseas. Among the tech companies in the S&P 500, Alphabet has the seventh-largest share of cash held overseas, with Apple Inc. (AAPL) - Get Apple Inc. Report claiming the top spot at 93%, according to Bloomberg. 

Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

The possibility of a coming tax holiday has spurred excitement among investors who believe it may give tech juggernauts such as Alphabet and Apple a way to put their cash to work. President Donald Trump has indicated that he favors a tax policy that would allow companies to repatriate their cash back to U.S. soil at a tax rate of 10% instead of the usual 35%. In that scenario, Alphabet could bring back roughly $52.1 billion in cash, which added to its domestic holdings, would give them about $89 billion for acquisitions. 

Alphabet's growing cash pile has caused many analysts and investors to speculate who could be next to land in its crosshairs. The latest rumor is that Alphabet tried to buy Snap Inc. (SNAP) - Get Snap, Inc. Class A Reportfor at least $30 billion in early 2016. There are plenty of reasons why such a deal would or would not have worked, but the arguments against seem to dwarf any arguments in favor. To some degree, Alphabet already has a social media network in YouTube (which it acquired for $1.65 billion in 2006), with its user-generated content and ability for users to interact with each other. The company also doesn't need any help in video advertising -- it claims 33% of the world's $223.7 billion digital advertising market.

More of What's Trending on TheStreet:

"What does Snap provide [Alphabet] that YouTube doesn't have? Very little," said Pivotal Research analyst Brian Wieser. "I don't think many people would expect this deal to happen." 

Alphabet has always been cautious about making splashy, blockbuster deals, CFRA Research analyst Scott Kessler noted. He added that it's possible that Alphabet approached Snap and that the talks fizzled out. A similar situation happened when Alphabet made a $5.75 billion bid for Groupon (GRPN) - Get Groupon, Inc. Report in 2010. Groupon rebuffed the offer after investors believed it had more room to grow; since then, Groupon has struggled on its own and currently only sports a $2.3 billion market cap.  

Apple and Alphabet are holdings in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPLor GOOGL? Learn more now.

Image placeholder title

TheStreet Recommends

Other big names that have been floated as possible targets for Alphabet include Netflix Inc. (NFLX) - Get Netflix, Inc. Report , Twitter Inc. (TWTR) - Get Twitter, Inc. Report , Spotify and workplace chat app Slack Technologies Inc. A deal for Netflix would give Alphabet access to the largest subscription-based video streaming platform, but it would also required a complicated integration and a hefty price tag, among other risks.

"Unless Google has this Hollywood dream of owning content and distributing content, I'm not sure it makes sense for them," said Creative Strategies president Tim Bajarin.

Slack, which is currently valued at $3.8 billion, according to CBInsights, could fit into Alphabet's trajectory of building out its line of enterprise software products, but like Netflix, it wouldn't come without some risks. 

"It's a large deal and also raises questions of how do you maintain the growth and monetization opportunities," Kessler said. "I just think the hurdles are very high for these types of larger transactions and you just have to have a lot of pretty optimal characteristics to do something like that." 

Alphabet's acquisition history provides an indication of what kinds of companies it tends to go after. According to CBInsights, the tech giant has scooped up more than 200 companies since 2001, starting with, a newsgroup search service. Since then, it has primarily gone after West Coast startups across a variety of industries, from media and entertainment to advertising. Several of its most successful products were acquired via acquisition, including crowdsourced navigation app Waze for $966 million, ad tracking company DoubleClick for $3.1 billion and mobile startup Android for a reported $50 million

The company also uses M&A as a means of entering or broadening its reach in new markets, such as its $3.2 billion play for NestLabs, which served as an entry point into the connected home. It also deploys Alphabet CEO Larry Page's well-documented "toothbrush test." The test asks: Is the product something you can use daily and would make your life better? If so, it's probably worth pursuing. 

"When we see products or developments or large companies that are solving a problem in a new way, that drives M&A interest," Don Harrison, Google's vice-president of corporate development, told Forbes earlier this year. 

More recently, Alphabet CFO Ruth Porat indicated that the company intends to make M&A deals focused around the cloud computing space. It's one area where Alphabet has some catching up to do, as competitors such as Microsoft Inc. (MSFT) - Get Microsoft Corporation Report , Inc. (AMZN) - Get, Inc. Report and IBM (IBM) - Get International Business Machines Corporation Report have gained increasing share of the market. As Google seeks to differentiate itself from rivals, Bajarin said it might target companies which specialize in machine learning and AI applications for the cloud as potential targets. 

The tech giant will sometimes do "acquihires," or deals designed to acquire a company's people rather than its products. In other cases, it will make deals based on a company's intellectual property that can be built into existing products. Bajirin said he doesn't see that strategy changing. 

"I don't see them going out and acquiring a big, big company," Bajarin explained. "It makes more sense for them to, as Apple has done, to survey the landscape and look for complementary intellectual property that can be integrated into existing core capabilities." 

More of What's Trending on TheStreet: