Analysis – Google acquiring HubSpot would increase its offering to challenge Microsoft

by Milana Vinn

(Reuters) – A potential acquisition of HubSpot, a U.S. marketing software maker with a market value of $31 billion, by Google parent Alphabet would increase its ability to compete with Microsoft in offering cloud-based applications to businesses.

Last month, Reuters reported that Google was exploring a bid for HubSpot. Such a deal would be Google’s largest, expanding its products and applications serving companies, analysts and investment bankers, they said in interviews.

Google is already challenging the dominance of the Microsoft Office platform with its Google Workspace collaboration offering. Buying HubSpot would make Google a competitor in the so-called customer relationship management sector, which Microsoft serves with its Dynamics 365 products, said Cowen analyst Derrick Wood.

“It appears that Google has aspirations to take away Microsoft’s office suite market share and may use HubSpot to connect applications for customers,” Wood said.

Representatives for Google, HubSpot and Microsoft did not respond to requests for comment.

HubSpot, which builds marketing software for small and medium-sized businesses, is looking for ways to maintain sales growth amid a broader economic slowdown.

HubSpot CEO Yamini Rangan said on the company’s first-quarter earnings call this month that customer demand has weakened as small businesses worry about the economic impact of high interest rates.

HubSpot maintained growth despite customer reductions, reporting first-quarter sales growth of 23% and operating margin of 15%. However, stock analysts warn that if it were not for Google’s participation in the takeover, the company’s shares would lose value.

Most analysts covering HubSpot lowered their price targets for the stock after its latest earnings report. Some warned that the company’s niche in serving smaller businesses, which sets it apart from larger enterprise competitors such as Salesforce and Oracle, could become a weakness if the economic downturn makes it more difficult to provide financing to these clients.

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“Tighter lending standards could have an extremely negative impact on access to financing for small and medium-sized businesses (which are HubSpot customers),” Goldman Sachs analysts wrote in a May 9 note.

HubSpot specializes in the so-called “inbound marketing”, in which the consumer initiates interaction with the brand. HubSpot customers use HubSpot’s software to create advertising content that consumers click on or follow up with on the Internet.

Inbound marketing relies heavily on search engines and social media to attract customers and convert them into leads, offering many synergies with Google, whose parent company Alphabet also owns the popular video streaming service YouTube.

While Microsoft has focused on attracting large enterprise customers, Google has also sought to attract the smaller companies that make up the bulk of HubSpot’s customer base.

The HubSpot acquisition will give Google a ton of valuable leads, filling a void as Google removes tracking apps called “cookies” from its Chrome browser in the second half of 2024, according to Stifel analyst Parker Lane.

“Removing third-party cookies from Chrome… puts more emphasis on first-party data, of which HubSpot provides plenty,” Lane said.

AI IN ADVERTISING

Alphabet CEO Sundar Pichai and other executives have said Google sees advertising as a key avenue for making money from advances in artificial intelligence.

“AI-driven innovation in our advertising ecosystem is critical to every aspect of our product portfolio, from targeting, bidding, creative, measurement and various types of campaigns,” Google Chief Business Officer Philipp Schindler said last month on a earnings call results for the first quarter.

Google entering into a deal for HubSpot would risk a challenge from antitrust authorities, although many experts agree that the merger would not restrict competition given the lack of overlap between the two companies’ businesses. This is due to regulators’ growing reluctance to expand the size of tech giants through acquisitions.

MorningStar analyst Dan Romanoff said Google may decide the potential benefits of the deal outweigh the potential for regulatory challenges.

“Amazon is the clear leader in the cloud, Microsoft is number 2, and Google is a little bit in third place. You can imagine Google saying, ‘If we buy HubSpot, it’ll be like having Microsoft Dynamics 365, so it’ll make us more competitive there,'” Romanoff said.

(Reporting by Milana Vinn in New York; Editing by Greg Roumeliotis and Richard Chang)