Google Is Overpriced: Why Acquire On2 in an All Stock Deal?

Google (GOOG) announced today that it will acquire On2 Technologies (ONT) for $106.5 million in an all stock deal. This is probably a great acquisition but the transaction type tells me something investors don't want to hear: I believe that Google stock may be over priced. Let me explain.

Google has a great balance sheet. The company has no debt with enough cash to fund cash-for-clunkers! Holding $19.34 billion in cash, it puzzled me to see Google use stocks to purchase On2. The acquiring price ($106.5 million) is only 0.55% of its total cash ($1,935 million).

If I own an asset which I believe is worth more than what the market tells me, I would be looking to trade that "paper" asset into "real" asset.

There are two ways of looking at it.

1. Google is really smart and their stock should go up.

1. Google stock may be over valued and it should go down.

You, as an investor, should pick which thesis fits you best.

Comments

[LA Tech:]

Where are the profits from ALL the non paid search products and services?

Nowhere to be found, that is where. The president of Google Enterprises uses these pages to boast about the "several hundreds of millions of dollars of profits" that is nowhere to be found inside Google's 10-Q report just filed.

Revenue growth at Google is now single digit.

Google is a great short at these lofty levels!

Aug 05 04:10 PM

[tombo:]

Just so. When your company's stock is overvalued, the best thing you can do is use your overvalued stock to acquire undervalued companies, or else issue more overvalued shares on the market to get capital to expand internally.

When your stock is undervalued, you either use your extra cash to buy back your undervalued stock, or better yet, use your cash to acquire other companies that are even more undervalued than your own. You don't use your undervalued stock to acquire other companies.

Aug 05 04:22 PM

[reinharden:]

Alternatively, the tax treatment for the sellers is way better in an all stock transaction than it would have been in an all cash transaction.

reinharden

Aug 05 04:30 PM

[learnmoney:]

My comment is directed to the above post..............YES it may have been more tax efficient to use Google paper rather than cash. Unless we know more about the transaction it is difficult to chatter or twitter about ths deal.
Are any of the other posters SHORT? I am think about it because I really do feel that the stock market is ahead of itself but I would only be a covered BEAR as I have never shorted a stock in my 40 years of trading.............it was a principal of mine taught by a trader on the London Stock Exchange who made fortunes by only being LONG.
Now you know where I reside .................

Aug 06 08:33 AM

[Robert H. H...:]

You may be reading too much into this.

reinharden's point is a good one. The sellers may prefer Google stock to cash for tax purposes. And if any ONT shareholders want cash, they can easily short the appropriate number of GOOG shares and lock in their value (assuming the deal closes).

Additionally, ONT stock has traded near the $0.60 value of the GOOG deal as recently as mid-May. The management and board may feel that GOOG is a good (or great) strategic partner. It's easier to argue the strategic value of a deal when the consideration is stock vs. cash. If management accepted a cash bid of $0.60 per share, it would be very difficult for them to resist a higher cash bid from an unwelcome suitor.

Aug 06 12:04 PM