Why Did General Motors Spend $1 Billion for a 40-Person Startup?

By Markets Fool.com

GM president Dan Ammann (right) with Cruise Automation co-founders Daniel Kan and Kyle Vogt. GM announced a deal to acquire the San Francisco self-driving start-up for a reported $1 billion last week. Image source: General Motors.

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When General Motors announced last week that it had struck a deal to buy San Francisco start-up Cruise Technologies, it wasn't much of a surprise. GM has been making investments in and acquiring start-ups for the last few years, bringing in new technical talent and new technologies that it hopes will boost its products.

However, several reports suggestedGM had paid a very steep price for a company with just 40 employees: $1 billion, perhaps more.

GM's statement on the deal didn't disclose the purchase price. It hinted that its primary motivation for the deal was to bring Cruise's engineering staff into GM. But even by inflated Silicon Valley standards, $25 million per employee is a crazy price.

Is there more to the story?

Something in Cruise's technology got GM's attention in a big way
Areportin The Wall Street Journalon the deal shed some light on that. The report quotes Nabeel Hyatt, a Spark Capital partner who led Cruise's Series A funding round in 2015. Hyatt said when GM first approached Cruise, it was interested in a strategic investment, not an outright acquisition.

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That makes sense. GM recently made a $500 million investment in ride-sharing firm Lyft, and the two are working together to build a framework for a future automated ride-sharing service that will use self-driving GM vehicles.

But, Hyatt told the Journal, GM decided to acquire Cruise outright after seeing its latest technology.

That suggests Cruise may have a piece of the self-driving puzzle GM had been missing. Cruise's product, called the "RP-1," is a system that can be retrofitted to certain Audi models to give them limited self-driving capabilities. It's roughly akin to Tesla Motors' current"Autopilot" system, allowing for hands-free driving on highways.

GM has been working on self-driving systems for years. A limited version of GM's own system, which it has called Super Cruise, was expected to come to market late this year as an option on the big Cadillac CT6 luxury sedan.

However, GM said in January it had delayed the system's introduction until sometime in 2017, hinting that it wanted to add additional functionality, or work out some imperfections in the existing version.

Might that be related to the Cruise acquisition?

A billion dollars to (maybe?) take a step forward in a crucial race
Whether the market is ready for them or not, the race to develop fully functional driverless-car technology is on. Alphabet's Google self-driving cars have probably garnered the most media attention, but nearly all of the major global automakers have some level of self-driving technology under development -- as do several key auto-industry suppliers, particularly Delphi.

While Mercedes-Benz was technically first to market with a very limited self-driving system, it was Tesla's highly publicized decision to roll out what it calls a "beta" version of its Autopilot system to Model S owners last year that got the ball rolling. Soon, some level of hands-off highway driving technology will be an expected feature on luxury models, and it'll likely make its way into the mainstream a few years after that.

Audi, BMW, Mercedes-Benz, GM's Cadillac, and other luxury brands have said they will have at least that level of functionality available sometime in the next year or two. Meanwhile, Toyota and Ford are both working on mass-market applications, hoping to bring more advanced self-driving features to mainstream models around 2020.

GM CEO Mary Barra is determined to "disrupt" GM before high-tech upstarts make the old automaker irrelevant. Staying a step ahead of rivals (or even keeping pace) can get expensive, as the Cruise Automation acquisition shows. For GM shareholders, the cost of this deal has to be a concern.

Still, Barra and her team have shown shareholders that they're very disciplined with investments. If they see something at Cruise that could deliver a significant return on that billion dollars, then I think GM shareholders should give them the benefit of the doubt, at least for now.

The article Why Did General Motors Spend $1 Billion for a 40-Person Startup? originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Ford, and Tesla Motors. The Motley Fool recommends BMW and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.