Saying that a company with an agreement to be acquired for $2.1 billion was killed may sound like an exaggeration. Many start-ups aim to one day be “killed” in such fashion. However, Google’s decision to acquire Fitbit amounts to a mercy kill, putting an official end to Fitbit’s implosion at the hands of Apple Watch. In just three years, the Apple Watch turned Fitbit from a household name as the wearables industry leader into a company that will eventually be viewed as an asterisk when the wearables story is retold to future generations.

The Offer

When news first broke that Google LLC had offered to acquire Fitbit for $2.1 billion, or $7.35 per share, many observers noted how low the offer price was compared to Fitbit’s earlier valuations. This was a company that had its initial public offering at a $4.1 billion valuation and had seen its stock price peak at a $13 billion valuation ($51.90 per share).

My initial reaction was that Google was being extremely generous with its offer. On an enterprise value basis, which excludes $565 million of cash and cash equivalents on Fitbit’s balance sheet, Google is valuing Fitbit at $1.5 billion. For a hardware company with $1.5 billion of annual revenue and declining ASP and margins, questionable intellectual property, a dying ecosystem, and a non-existent product strategy, Google looks to be overpaying for Fitbit.

Industry observers speculate that Google’s offer price reflects the company seeing something in Fitbit that the marketplace missed. Instead, Google’s generous offer price has the makings of being a goodwill gesture aimed at Fitbit employees who have wealth tied to Fitbit stock. The $7.35 offer price represents close to a three-year high in Fitbit’s stock price. Holding Fitbit’s feet to the fire in terms of valuation wouldn't have helped Google retain Fitbit employees for beefing up its fledging hardware team.

On the flip side, Fitbit co-founder and CEO James Park and the board deserve a round of applause for securing such a generous offer from Google. The acquisition can be viewed as Google offering Fitbit a dignified and gracious death and Fitbit’s board as correct to take the opportunity.

Fitbit’s Story

There are two chapters to Fitbit’s life as an independent company. From 2013 to 2016, Fitbit leveraged low-cost, relatively rudimentary fitness tracker bracelets worn on the wrist to consolidate what had been a fragmented market for quantifying one’s physical movement. Fitbit even managed to move into the realm of coolness. Wearing a Fitbit in public contained positive connotations as the user was viewed as being on the forefront of technology. The smartphone revolution also played a role in Fitbit’s rise as people became comfortable giving a new crop of mobile devices an increasing number of roles to handle.

During the early years, Park successfully navigated Fitbit through a tumultuous period that included the company recalling the Fitbit Force for causing skin rashes and burns on nearly 10,000 people. Park also competed effectively against other early wearables pioneers. An ugly battle with the well-funded Jawbone regarding intellectual property theft ended in a settlement. Fitbit became a household name for health and fitness tracking.

Everything changed in 2016. Fitbit’s unit sales, as shown in Exhibit 1, peaked. On the surface, the subsequent decline in unit sales may not have looked too bad considering that demand stabilized around 15M units per year. However, for a hardware company dependent on rising unit sales, the development was alarming. Once again, Fitbit management did the right thing and quickly cut expenses at the first sign of demand weakness. The belief was that Fitbit could manage its way out of the sales slump.

Exhibit 1: Fitbit Unit Sales (Annual)