In January 2014, Google Inc. was considering the acquisition of Nest Labs Inc. for $3,200 million. Nest Labs manufactures and distributes smart thermostats and smoke alarms, with auto-programming and detection capabilities that allow users to control remotely. Nest sold about 40k devices monthly for $119 million in annual revenue during 2013. Overall, the home hardware industry is expected to grow 3.2% annually. The transaction allows Google to deliver products in smart home applications, which is expected to grow more rapidly than the general home industry. In the first year under its ownership, Google is anticipating cash flows of $22.4 million. Google's cost of capital is estimated at 6.5%. Questions 1. Given our analysis of Google's diversification strategy, do you think the acquisition of Nest Labs will contribute to the company's overall performance? 2. Based on the information above, what growth rate in cash flows is required to cover the cost of acquiring Nest? Would you have bought Nest Labs? Please describe. 3. Did Google have the financial capacity to acquire Nest Labs in 2014? Use the data below to assess this question. Financial Statements 2011 2012 Income Statement Revenues Cost of revenues Gross profit 37,905 13,188 24,717 46,039 17,176 28,863 2013 55,519 21,993 33,526 Balance Sheet Cash and cash equivalents Marketable securities Other current assets Total current assets 2011 2012 2013 9,983 14,778 18,898 34,643 33,310 39,819 8,132 12,366 14,169 52,758 60,454 72,886 Research and development Sales and marketing General and administrative Other expenses Operating income 5,162 4,589 2,724 500 11,742 6,083 5,465 3,481 7,137 6,554 4,432 Non-marketable investments PPE, net Goodwill Other assets, non-current Total Assets 790 1,469 1,976 9,603 11,854 16,524 7,346 10,537 6,066 2,077 9,664_13,468 72,574 93,978 110,920 13,834 15,403 496 Other income (expense), net Income taxes 584 2,589 635 2,916 2,552 Total current liabilities Long-term Debt Other long-term liabilities Total Liabilities 8,913 14,337 15,908 2,986 2,988 2,236 2,530 4,938 5,467 14,429 22,263 23,611 Net Income $ 9,737 $ 11,553 $ 13,347 Total stockholders' equity 58,145 71,715 87,309