FIT Fitbit Inc

By Patrick Thomas and Rob Copeland 

Google reached a deal to buy wearable fitness products company Fitbit Inc. for roughly $2.1 billion, a move that intensifies the battle among technology giants to establish dominance in mass-market platforms that could succeed the smartphone.

For Google, the deal marks a further push into consumer electronics, an area where it has yet to gain significant traction to complement its massive internet-search and advertising business. It also puts Google in renewed and direct competition with Apple Inc., which this week said rising sales of wearables and related services were becoming a bigger driver of its earnings.

Google, a unit of Alphabet Inc., said Friday it will acquire the maker of fitness trackers and smartwatches for $7.35 a share in cash, a 19% premium to Fitbit's closing price Thursday and a more than 70% premium from last week before deal talks were first reported by Reuters.

Fitbit shares rose 16% in morning trading while Alphabet's shares ticked up slightly.

The deal lands at a moment when Google and other tech giants are under scrutiny on a number of fronts over their competitive practices and dominance of certain businesses.

Fitbit makes so-called wearables, or watches and bracelets that track health information like heart rate. It also has a paid subscription service that suggests exercises and other lifestyle changes based on the individual data it collects.

Given that Fitbit collects such myriad and personal data on its users, the deal will also raise issues around consumer privacy. In announcing the acquisition, Google said it would not use Fitbit data to help power its massive online advertising business.

"Similar to our other products, with wearables, we will be transparent about the data we collect and why," Rick Osterloh, the head of Google's hardware division, said in a statement. "We will never sell personal information to anyone. Fitbit health and wellness data will not be used for Google ads. And we will give Fitbit users the choice to review, move, or delete their data."

The regulatory scrutiny hasn't brought Silicon Valley deal making to a halt. Google agreed in June to pay $2.6 billion for Looker, a maker of business intelligence and data analytics software, to bolster its cloud business. Facebook Inc. this fall reached a deal to buy brain-computer interface technology startup CTRL-Labs Inc.

For all their promise, wearables as a category have had as many misses as hits. Google several years ago launched a brand of smart glasses that attracted as much ridicule as buyers, and Snap Inc. got a similarly disappointing consumer response to its Spectacles line.

Apple in many ways is a model for what Google hopes to execute. While the Apple Watch was initially a disappointment, sales have picked up lately, and the company's AirPods were an immediate hit. The iPhone maker said on Wednesday that sales in its wearable business soared 54% in the latest quarter.

Google's purchase of Fitbit shows its interest in bulking up its hardware business, consisting mostly of niche products like the Chromebook laptop and Pixel smartphone. That remains a work in progress. Google has spent billions on targets like HTC Corp., a smartphone maker, and Nest, a speakers company, with little to show for it in sales, analysts say. Google doesn't break out financial performance for its hardware division.

It hired Mr. Osterloh, a former Motorola president, in 2016 to steer the nascent unit. In an interview with The Wall Street Journal last month, Mr. Osterloh often referred to the hardware unit as a "startup" within the conglomerate.

"I think eventually this will be a very large, important business," he said.

Some analysts said the company's troubled history with hardware warrants skepticism about Google's ability to integrate Fitbit in its ecosystem of products.

"The acquisition is another example of Google tilting at windmills" in hardware, analysts at Wedbush Securities wrote in a report Friday. "Google is uniformly bad at consumer products in our view, and appears to us to be intent on spending whatever it takes to prove our view wrong."

James Park and Eric Friedman founded Fitbit in 2007, envisioning that sensors and wireless technology could be integrated for a wearable product to track fitness and health. Fitbit has since sold more than 100 million devices world-wide, and has more than 28 million active users, the company said.

"Google is an ideal partner to advance our mission. With Google's resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone," Mr. Park, who serves as Fitbit's CEO, said in a statement. The deal is expected to close in 2020, Fitbit said.

The San Francisco company relies largely on the sale of its devices, but it has been working to expand its subscription business to develop a source of recurring revenue. The company rolled out a new subscription service, Fitbit Premium, earlier this year aimed at providing health and fitness guidance for smartwatch owners.

In the first six months of this year Fitbit reported $585.4 million in revenue, up from $547.2 million in the year-earlier period.

Fitbit's results have been pressured in recent months. In July, it lowered its full-year revenue outlook after weaker-than-expected sales of its new smartwatch model, Versa Lite. The smartwatches are aimed at competing with popular offerings from Apple and Samsung Electronics Co.

Still, the company reported narrower losses in the second quarter as sales of fitness trackers jumped 51% and the health division showed some strength. Fitbit is scheduled to release its third-quarter earnings report Nov. 6.

Analysts have said the deal for Fitbit could allow Google to expand its reach into medical technology, an area where technology and health-care companies are competing to develop new ways for consumers to corral their digital health data.

Apple is rolling out online tools that consumers can use to bring together health information siloed in the systems of hospitals, doctors and insurers. Apple said this week that it is continuing to build out its health-records capabilities.

Fitbit's health division, which partners with programs like Medicare and some health insurers, to develop wellness applications, saw sales climb 16% in the second quarter and are on track to hit $100 million this year, the company said.

Write to Patrick Thomas at Patrick.Thomas@wsj.com and Rob Copeland at rob.copeland@wsj.com

(END) Dow Jones Newswires

November 01, 2019 12:46 ET (16:46 GMT)

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