Here's a quick mockup showing how much more of the conversation could be shown on a 5.1" galaxy S7 with no loss of useful features. Here the percent increase in visible text is significant, but not as much as on many other phones, such as my Moto X2 which, despite having a 5.2" display has significantly less usable space due to the onscreen back/home/recent tasks buttons.
What I've done should be obvious, here's the justification:
The green header (magic bar) has been made half as tall. Active yesterday is frankly optional and could be eliminated, but getting rid of the redundant go back arrow leaves enough space for it to remain. Last active arguably should be shown down in the conversation view next to to the (j) icon. Either way, no excuse for hiding so much of the current conversation.
The second "magic bar" inside the "write a message" area contains useful but rarely used options. There's absolutely no reason why they could not be put on the upper magic bar, under the [...] menu. The whereami button is legitimately useful, and perhaps deserves to be on the main magic bar, the rest can go under [...]. Maybe you are the type to use lots of emoji's so perhaps you would mind the placement of the emoji icon in the [...] menu? Need I remind you that the keyboard has two emoji buttons of its own? Alternatively, the emoji icon could stay visible in the "write a message" area until you actually start typing.
This is all a general symptom of valuing pretty-(stylish?)-at-a-glance over useful-all-the-time. And a small dose of "easy to discover", since hiding the 2nd set of magic buttons under the menu does make discovery slightly harder. So, no big deal. Google, give us the option under settings to enable a compact view, for goodness sake. This gives you "pretty" and discoverable to start out with, and provides usability for your actual users too.
It's really too bad that hangouts no longer supports xmpp or the 3rd party api, or I'd write a simple client that didn't suck so bad. Given that there's no advertising in hangouts, it wouldn't even lose Google any money if people prefered my app over theirs.