4 Places Google Could Put Its Money, But Shouldn't

money in handGoogle (s goog) said this week it might buy a big company “every year or two,” targeting “some accelerant that it would provide for revenue, some major, major user base that we did not currently have access to.” What’s surprising isn’t that Google is thinking this way, but that it’s admitting it so publicly. In the sometimes feverish world of M&A (and right now is one of those times), those are rousing words.

Schmidt surely knows this from his years as an executive, but if Google is really buying, it might make sense to pretend it’s not. In the Internet sector, just hinting such a thing when you have $22 billion in your back pocket (while generating nearly $3 billion from operations last quarter) can spur rumors, and rumors can drive up company valuations. There are already rumors that Google’s going on a big buying binge, setting its sights on the likes of Akamai (s akam) (Adam Kramer shot that one down already).

So while it’s tempting to speculate on what Google should buy, let’s look instead at what Google could buy, but shouldn’t. I’ve argued before that, given the history of M&A in the web sector, a surge of new deals could end up like a 2 a.m. barroom — a place where thoughtless but impulsive decisions can lead to regrets. So here are four deals that might seem tempting, but would be best to forgo.


Why it could happen: YouTube hasn’t turned a profit. Hulu has. Why? We’ll watch a commercial per break (or two, as seems increasingly common) for Jon Stewart or Tina Fey, but not for the Drunk Kardashians or TV for Chickens. Networks are starting to press harder on Hulu, limiting its offerings. Hulu could help kick YouTube down its path to profitability. Hulu could also make Google even more dominant presence in online video than it is now.

Why it shouldn’t: Hulu could make Google an even more dominant presence in online video than it is now. No one — whether studios or viewers — is crying out for Google to be more dominant. Also, I find Hulu’s interface to be superior. YouTube’s is still too devoted to its original design, as if its users would freak out if a new interface from scratch brought a better viewing experience. Also, as Om has argued, Yahoo (s yhoo) is a better fit for Hulu. Besides, someone has to compete with Google in video.


Why it could happen: eBay’s (s ebay) marketplace business doesn’t really fit into Google’s business plan, although if things keep turning around, it could contribute to revenue growth. Checkout has never taken off, but PayPal could strengthen Google’s e-payments options while offering PayPal access to new shoppers and retailers. Skype could just offer an end run around the obstacles that AT&T (s t) and Apple (s aapl) are tossing in front of Google Voice. And Google’s legal clout might even help Skype in its battle with the VoIP services’s founders.

Why it shouldn’t: Mixing a company with a few silos of independent units (eBay) with another company with such a broad vision, one that it’s sprawling in all kinds of areas (Google), would create a nightmare of integration. The 77 percent rise in eBay’s shares so far this year, which gave it a $32 billion valuation as of Friday, also makes it less than a bargain. Google would need to pay largely with its stock, and such a big deal would be dilutive to investors (including Google employees), especially if other big deals are on the table.

Twitter or Facebook

Why it could happen: Early reviewers of Google Wave are largely impressed by the technology but puzzled by the strategy. Wave is more of a collaborative tool — a gun aimed at Sharepoint rather than Facebook or Twitter — which leaves Google still largely absent in the social media landscape. Facebook could add to Google’s revenue, while either company would offer the kind of “major user base” to which Schmidt referred.

Why it shouldn’t:
From a financial perspective, a Google purchase wouldn’t help Facebook or Twitter, neither of which is hurting for capital. And from a strategic perspective, it could hurt. Both are still innovating services that are in the early stages of development. The task of integrating their technologies with Google would slow that process down. That would be bad for users of Facebook and Twitter, and it would take out exactly the kind of competitors Google needs as it strives to innovate in the social media arena.

Talk about Google buying these companies isn’t new, but chatter is likely to pick up now that Schmidt has tipped Google’s M&A hand. While deals involving smaller, search-oriented companies like Russian engine Yandex and mobile-ad company Jumptap would make sense, it’s hard to imagine Google buying a bigger, established company without creating more problems than it aims to be solving.