Why 'GooBay' Makes Sense

Yes, this is yet another article about why company A should merge with company B. I hope what this article lacks in originality will be more than made up for with plain old common financial sense.

It’s Good To Be King

Google’s (GOOG) earnings report yesterday has solidified without any doubt that Google continues to be the king of the dot com world. Google had 4th Quarter revenues of 5.7 billion, representing an 18% increase over the fourth quarter 2007. These results are remarkable considering the current macro economic challenges we are facing. These earnings only add to Google’s formidable war chest – $15.85 billion as of December 31, 2008 to be exact. Google has not only been able to deliver – but it also has been able to keep the wolves at bay.

Microsoft (MSFT) and Yahoo (YHOO) continue to struggle to gain reasonable traction in the search business. As of December, Google has still been able to maintain is formidable lead against competitors. (Source: Comscore.) With all of this going for Google, I argue that now is the time for Google to seize the opportunity of depressed market valuations and seal its claim as the preeminent global internet powerhouse.

One Trick Pony?

It was nearly a year and a half ago that Steve Ballmer called Google a “one trick pony,” pointing out that Google has not had much success in business areas outside search engine advertising. What was true then is still true now. A look at the full year results for 2008 confirm this. The earnings report yesterday illustrates that 97% of all Google’s revenue came from advertising.

There is no question Ballmer is right with his criticism, granted a darn good money making pony, but still one trick nonetheless. People that disagree with this assessment need look no further then Google’s own efforts to (what’s that word?) DIVERSIFY. Google Base, Google Checkout, and the Android mobile OS come to mind. In fact, the desire to come up with new and inventive things beyond search is so ingrained in the culture – the company encourages personal projects and has a whole “labs” section devoted to such arcane subjects as maps of Mars (how the company would ever monetize that was always beyond me).

Why eBay (EBAY)?

I ask why not? It’s a natural fit. Google has already tried to create an eBay clone with Google Base. It already tried to create a PayPal clone with Google Checkout. It was also no secret that Google was one of the few suitors during the bidding wars for Skype.

As I’ve discussed in previous articles; many investors do not realize that eBay.com is a huge conglomerate of dot com properties. My previous thesis even went as far as showing that eBay.com proper was actually not even priced in at a valuation. That was when eBay was trading far higher than today. Based on current valuation – eBay is even more of a compelling value play. (Its price is nearing book value.)

The Crown Jewel

As I said, it’s no secret that Google derives 97% of its revenue from ads from its search functions. It's a tenuous position considering the fickle loyalty we witnessed when users seemed to flock overnight to Google from Yahoo back in early 2000s. Regardless of the ability of another site to disrupt Google’s blue ribbon position, Google is smart enough to know that it should diversify. Enter Google Payments, at less than 10% market share, and neophyte services (like buyer/seller moderation) – it’s not exactly the PayPal killer it was perceived to be.

Google would be able to diversify and become the leader in not one but two segments of the internet landscape in one fell swoop. What Google is to search, PayPal is to peer-to-peer payments. With PayPal’s recent acquisition of Bill Me Later, it now commands a nearly 90% market share of e-payments. Like Google, PayPal grew revenue and earnings in Q4 of 2008 – it is the undisputed crown jewel of eBay’s empire; growing and very profitable. But why stop at two?

A Jewel in the Rough

Skype has always been an enigma to me - based on why my financial colleagues have called it, you would think it is the dot com equivalent of the Yahoo/ broadcast.com acquisition. Adjectives like “overpriced”, “unprofitable”, “no future”, “no synergies”, “biggest loser” – by the time you're done reading about Skype, you would think it was as limp as the sock puppet from Pets.com. If there is one thing I agree with the critics, is there are no natural synergies with eBay.com and/or PayPal. Skype doesn’t offer a significant advantage over picking up a phone and calling a seller (if you really wanted to). But what it lacked in synergies with an auction site – I believe is the opposite with mobile devices.

It is true that certain technologies, for whatever reason, sometimes take a while to catch on. Take texting for example. It was mainstream in Asia for years before the first teenager got sore thumbs broadcasting his or her life on Twitter. I believe VOIP is similar to one of these technologies. Vonage (VG) never took off, nor did a whole host of available VOIP offerings by big telecoms.

However, the wild card is cell phone apps. Skype already has an application on Google’s Android OS and is soon to complete one for the iPhone. For those not too savvy about what this means, well it means free or very cheap domestic/ international calling regardless of how many minutes you have on a phone plan. I’ve been using the former applet on my cell phone to call internationally, and I’ve found no easier way for me to call the world cheaply on my cell phone then Skype.

Skype now has been profitable for 2 years, and is ACCELERATING user growth (yes, even in this tumultuous 4th quarter). Skype earned 550 million in revenue in 2008. Assuming the current economic crisis hits revenue growth and causes it to decelerate by half to 25% for 2009 next year, we can still expect somewhere around $688 million in 2009 revenue.

A Tarnished Gem

eBay has made a string of extremely controversial moves in 2008. Make no mistake, eBay is undergoing a serious midlife crisis. From prohibiting sellers from leaving negative feedback, to changing free structures, from launching a new flawed search engine, to draconian measures that kicked out many sellers – it would be an understatement to say that eBay changed in 2008. These changes were driven top down as a strategy to go directly head to head with traditional retail outlets like Amazon.com (AMZN).

John Donahoe is attempting to shake the ‘swap meet’ reputation of eBay to a traditional ‘safe’ shopping destination. The changes alienated many buyers and sellers – many buyers turned away by things like the arcane search engine flocked to established retail outlets like Amazon, and many disgruntled sellers have left (taking with them much needed revenue). It’s not hard to see how much negative sentiment eBay has generated with sellers - peruse any message board regarding eBay and you’ll find throngs of ex-eBay sellers spending an inordinate amount of time bashing the company.

Google swallowing up eBay would first accomplish what many sellers and investors have been calling for: a change in management, and second (and more importantly), it would give eBay a much needed shot in the arm by increasing its visibility by increasing the number of eBay listings that would now be subsidized by default Google search placement. Overnight, eBay would increase the amount of traffic it receives simply by Google using its industry leading search engine to funnel prospective buyers to eBay’s listing pages.

Google’s undisputed expertise could make the eBay search engine second to none for product search. In a two bird one stone move, Google could win over ex-eBay sellers by promising a more diplomatic approach to buyer/seller dynamics and increase eBay’s bottom line. Google could appease established advertisers by only displaying ads from casual sellers (a simple filter by excluding high feedback sellers). This would re-invigorate the consumer to consumer marketplace at a time when a lot of us could use some extra cash emptying out our attic.

What Cost?

The question is, what is eBay.com really worth?

Well, in a previous post, I laid out all the numbers and concluded that current valuations have pretty much already excluded eBay.com proper as part of the total valuation at a price of $15 per share.

The value play is all the more compelling at eBay’s current price of $11-$12. Even at double eBay’s current valuation of $15B ($30B Purchase Price) – I argue acquiring eBay and all its assets would be a steal. Could GooBay be a reality? Only time will tell.

Disclosure: Long Google, eBay, Microsoft; no position Yahoo, Amazon.

Comments

[redbaron:]

Google buying eBay would be a big mistake. Why buy into a failing business model, when you can continue to focus on one that works?

This is just wishful thinking on the part of an eBay stockholder, and I would suggest that more could be gained by just using the same effort to get rid of current management. Nothing good will happen to eBay until current management is changed.

IMHO

Jan 23 07:37 AM

[a. palmer jr.:]

Google merging with ebay? What do you have against Google that you would propose such a thing?

Jan 23 08:45 AM

[M dub:]

Auction revenues were own 16%, not immune to the concept that in order to "sell your old led zeppelin records" someone has to have the money to buy them. You appear to be living in the past with relative valuation.

Auction has cut off its hand to spite its face (amazon). Absolute valuations are better once you know where the bottom will be.

Dare to say where the bottom in auction earnings will be and when the inflection point will be? Cause i'd like to know.

Jan 23 10:01 AM

[Wake-Up!:]

If Google hops in bed with eBay, they can expect to catch the same STD (Severely Tanking Deal). Look at Yahoo/eBay, and they've only been cuddling!

Jan 23 10:03 AM

[Bob C:]

Why buy, when you can create?
Google could probably just look around their own stockroom, pick out a couple of 'hats on backwards' youngsters, and say to them:

"Come in here and build us a an auction site, like the old eBay, and keep it simple enough for a caveman to use."
Keep the fees small, and listen to the customers, the sellers, and cut em loose!

BINGO!
No more eBay!!!!

Jan 23 10:27 AM

[Yankee Trader:]

Say it isn't so!!! Don't ruin Google!!!!

Hey Donahoe! Wake up!! It is the 'swap meet' mentality that built the former giant eBay. People like swapmeets! If you doubt it just go to your local one and ask some folks.

Bonanzle.com is our new swap meet and people love it!!! Join us there.

Jan 23 11:23 AM

[Seller101:]

What eBay fail to analyze is that their policies and changes are not gear to help their core supporters, the sellers! We the sellers are the ones that make the money for ebay, the direct consequence is very simple we the sellers are no listing as many items as we once did, because the Sellers fees are used to staff programs geared to prevent sellers from selling on Ebay, the coveted Best Match search is fatally flawed, it list the most expensive items first –hence making more money for ebay, if they sell- We can't believe that eBay is using Their coveted ‘Best Match” search engine, As their vehicle for a better buyer experience!
The Best Buyer Experience is coming to eBay To find great products at great prices! Buyers come to eBay to find a bargain, Buyers come to eBay to experience the eBay That wants to offers the best deals in the internet! But now eBay default search systems, List more expensive items first with total disregard of ending times or pricing These changes are causing a tremendous Decrease on sales with the direct consequence Of a decrease on the number of successful listings.
The DSR system is another failure, the feedback rating is not based on a 100 point scale, For example, from 1 to 5, 1 is poor, 3 is average and 5 is excellent. With e bay, 4,5 is average and 5 is good! Consequently making the seller looks bad, For this reason, good sellers offering great service and products are being suspended from ebay by record numbers, this cuts the core business at ebay Unfortunately, Ebay management become so enraptured with its tale of its own brilliance that they thought they could afford to batter and bleed the sellers over and over again, forever. Ebay Stock was $30-$32 less than a year ago and yesterday dropped to $11.67 A year ago, EBay said it would reduce listing fees and make selling standards more stringent to attract buyers, on the contrary sellers are listing less not only that but the smart ones sold their ebay stock! It won’t be too long too see ebay stock fall to $6 or less, Ebay is pushing away its partners, sellers and buyers, it is only going to make profit softer and push away investors, as ebay CEO said “We didn’t gain ground, but we didn’t lose any.” Lets see if he can say the same in this coming summer.

Jan 23 11:27 AM

[Colin Y.J. ...:]

There is absolutely nothing wrong with Google being a one-trick-pony. Pay-Per-Click advertising is the greatest marketing invention on the Internet. As long as anyone, anywhere wants to sell stuff online with ACCOUNTABLE advertising... Google will continue to be in business.

Google is now also leveraging its vast content network with the same PPC model. Imagine, you can now post ads that end up on Martha Stewart and ONLY pay when someone clicks on it... as opposed to the old model of advertising where you pay thousands of dollars get a banner ad up there for a limited number of "impressions."

Jan 23 12:36 PM

[Carousel:]

I'd like to agree and I will. Not being the typical eBay story commentor (a disgruntled eBay/PayPal user with too much time on their hands and probably with very little, if any, shares of eBay stock owned), I may be able to shed a different perspective from the folks above.

Sure, eBay is a maturing company just as Google is starting to do. However, eBay is still a cash cow. Each of eBay's additional (hot) properties (PayPal, Skype, StubHub, and slowly but surely Kijiji) are worth a decent chunk of change on their own and are leaders in their fields. Not to mention that eBay is extremely cheap at this point in time.

Skype would fill Google's need for communication that they have been toying around with in different forms. PayPal would give them the payment facilities they have also been desperately seeking. Kijiji and the 25% stake in Craigslist would given them a rounded out ecommerce complement to what eBay and StubHub bring. All this while accumulating all the data behind these sites, like Google likes to do and claim ("manage the world's data"). Google will then twist it in different ways to squeeze out new products, services, and advertising revenue.

The savings eBay would enjoy, if owned by Google, in terms of advertising in search results would help save on eBay's costs as well as allow more search result penetration like back in the days when pretty much any search term on Google resulted in an eBay result (even if it made no sense "Find 'wine stains' on eBay").

I just don't know how Google could manage such a gigantic endeavor.

At its current price, this makes mostly sense. If eBay ever gets back up in the 20s, I don't think it would make as much sense.

eBay or Amazon would definately benefit from better integration with search engine results since both of their internal search mechanisms are lacking even though they have improved as of late.

Jan 23 01:54 PM

[Bob C:]

Mr Wang,
You got this part right:
"(a disgruntled eBay/PayPal user with too much time on their hands and probably with very little, if any, shares of eBay stock owned)"

Many former "disgruntled sellers" did indeed own eBay stock, at one time.
Most sold when they saw the writing on the wall showing where eBay was heading.
Former CEO Meg Whitman did the same, on her way out the door.

Sorry, but your "cash cow" is running dry.
I hope you didn't also own Enron shares.

Jan 23 02:33 PM

[Bob C:]

PS: to Mr Wang,

Just how much work, and money did you put forth in helping to build eBay?
Please cast no stones at unhappy past or present eBay sellers!!

Jan 23 02:38 PM

[donzelion:]

eBay has some valuable assets, but just as Netscape was dominant for its time (until IE destroyed it) and Yahoo was dominant for its time (until Google destroyed it), the basic franchise itself doesn't seem to have any basis for its staying power. Hence, Paypal and Skype are the interesting jewels, but I can't see either as a neat fit with Google.

Jan 23 02:40 PM

[Marcap:]

The question often arises...What is eBay really worth?

The answer to that question depends entirely on what one considers to be included in "eBay". If "eBay" includes PayPal, Skype, etc, then IMO eBay has a current value at best, of somewhere between $10 and $12 per outstanding share. If however, eBay chooses to spin-off PayPal and Skype as some have suggested recently, then the remaining value of eBay would be next to nothing.

Unfortunately, eBay offers very little any more which cannot be purchased elsewhere (online and off) for less. A combination of eBay's outrageous fees and recent anti-seller policies have brought on that reality. Sadly, the days of the Ma and Pa operations on eBay are quickly drawing to a close, replaced by the ever-obvious mega store entities.

Yes, there are those who will argue that total eBay listings have not dropped substantially, if at all, over these past couple of years. But while that may in itself be true, what such claims fail to address, is that while the total number of listings may be at the same level, the total number of sellers offering them has decreased dramatically. i.e. 1000 small sellers each with 300 listings exit...1 mega seller with 300,000 listings enters. Who's fooling who?

Jan 23 05:31 PM

[Tony O:]

Um...i saw no mention of one of the real reasons EBAY is losing business - Craigslist, which surprise, surprise EBAY holds a 25% stake in I believe.

-T

Jan 23 06:35 PM

[eBay +++:]

Bob C come on? You know Google already tried to create an eBay with Google base, it was a joke, still is. Even Microsoft tried with FairMarket, another joke, much like your Bonzagle crap site

I like the thought of Google with eBay, but it won't happen too much ego with both Leaderships to make a deal. eBay and Yahoo talked briefly a few years ago and couldn't make it happen, but that turned out for the better.

Lastly eBay is a cash cow like it or not, even solid companies are inching toward the RED now, eBay isn't even close, 2.2 billion in 2008. Watch how razor thin Amazon margins are, they had to give away the house in Q4. Sure their Rev look great, but their Margin will be laughable. eBay is as solid as ever and well positioned to weather the economic storm, Q4 was proof of that.

Jan 24 09:49 PM

[Bob C:]

"Google Base is a place where you can easily submit all types of online and offline content, which we'll make searchable on Google (if your content isn't online yet, we'll put it there). You can describe any item you post with attributes, which will help people find it when they do related searches."
as per Google

eBay sellers, at one time, used Google base to direct potential buyers to their items on eBay.
Now the sellers are using it to lead them away from eBay, and to the many other venues where they have set up shop.
And it is working very well!

It was not an attempt to "create an eBay" but it is presently helping to bring eBay to its knees.

Q4 2008 was a disaster for eBay, but Q1 2009 will be worse.

Jan 25 08:00 AM

[eBay +++:]

Bob C this should have had no impact of eBay, none right, nada, nill?
eBay should be growing despite this, right? This is NOT the dip of year of 2000, where eBay was a Star. This is much, much different environment, the casualties will be much heavier and eBay won't be one of them.

www.marketwatch.com/Ne...={D87827B0-F739-42A7-A...

Jan 25 02:13 PM

[eBay +++:]

Ah too bad it wouldn't take the full link.

www.marketwatch.com/Ne...={D87827B0-F739-42A7-A...

Jan 25 02:15 PM

[maz:]

Well marcap anyone can throw out a $10 - $12 valuation to eBay but how exactly did you come up with that?

And eBay minus Skype & PayPal at $0?? You need to give your head a shake. Even if it were to decline 10% a year to zero it would be still worth the enormous cash flows it produces & I dare say eBay marketplace is not in a complete run-off situation even if auctions are declining.

Jan 26 01:56 AM