Why Apple, Google, Microsoft or Yahoo Should Buy MySpace

by: NakedValue

News Corp (NASDAQ:NWSA) acquired MySpace.com in July 2005 for $580 million in cash. After some early successes, highlighted by a three year $900 million advertising deal with Google (NASDAQ:GOOG), MySpace has fallen out of favor and been eclipsed by Facebook and Twitter. In early 2011, News Corp eliminated half of MySpace's workforce and studied strategic alternatives for the troubled segment.

According to comScore Media, as of June 2010, MySpace had 101 million unique global users. As of February 2011, the number of worldwide users fell to 63 million. This is a staggering drop, but it is still an undeniably large user base. In early 2011, Facebook raised funds through Goldman Sachs that valued the social media site at $50 billion. With 500 million users, this values Facebook at roughly $100/user. Based on this estimate, MySpace's 63 million user accounts could be worth $6.3 billion. Of course, this is a bad comparison since Facebook and MySpace are on different trajectories, but it's still a useful exercise because it shows that MySpace has significant potential for a strategic partner that is able to stem user defections.

There are reports that News Corp wants $50 to $200 million for the distressed web asset. Apple, Google and Microsoft should all consider acquiring MySpace. At the low end of this range, MySpace.com could be the technology acquisition of a lifetime.

With more than $50 billion in excess cash, Steve Jobs raised eyebrows during the last conference call when he spoke about using the capital to for "strategic opportunities." While there has been chatter about Apple acquiring a flash memory manufacturer like SanDisk (SNDK), it would be out of character for Apple to acquire a hardware supplier.

An acquisition of MySpace makes much more sense because it gives Apple an opportunity to do what they do best, which is to design and market a consumer experience. This could be more than simply a venture into social media as we now know it. A reconfigured MySpace could give Apple users a nexus between the company's products. As Apple becomes more dependent on internet devices, maybe it also makes sense for them to venture onto the internet.

Google may be the most natural acquirer. In 2007 it lost a bidding war with Microsoft to buy a 1.6% stake in Facebook. Google's famously unsuccessful baby step into the world of social media via Google Buzz likely illustrated to management how difficult it can be to build a social media platform from scratch.

Despite it scurrent domination of the internet search and online advertising, Google has to sense the growing competition from Facebook. While their businesses appear different enough, there's no clearer evidence of competition than the employee defections from Google to Facebook. The employee losses became so problematic that Google was forced to offer 10% raises and a $1,000 cash bonus.

Purchasing MySpace could be an inexpensive way to combat a dangerous competitor that has a competing email network and a fast growing advertising business.

In 2010, Microsoft spent almost $18 billion in dividends and share repurchases. While this exhibits exceptional respect for shareholder value, it also signals that the company has limited growth prospects. Microsoft has already expressed confidence in the social media model through its $240 million investment in Facebook during October 2007. Purchasing MySpace is a logical next step. It is a cheap growth opportunity that could produce synergies with Microsoft's Bing search engine.

While a MySpace purchase could make sense, we think Microsoft is much more likely to overpay for the right to provide search on Facebook's search bar.

A Yahoo acquisition of MySpace would be ironic. Both companies were dominant but eventually made obsolete by an upstart competitor. This could make sense for both News Corp and Yahoo, especially if News Corp is willing to exchange MySpace for either shares of Yahoo Japan or Alibaba (OTC:ALBCF).

While Yahoo already ceded the search engine business, Yahoo.com is still the forth busiest website in the world, benefiting from popular internet properties including Yahoo Mail, Yahoo Finance and Yahoo Sports.

CEO Carol Bartz has focused much of her tenure on cost cutting and organizational restructuring, but an acquisition of MySpace would be a bold way for her to put her creative stamp on a new Yahoo.

Apple, Google, Microsoft and Yahoo are all attractively priced stocks (see this article), but there is tremendous upside potential if any of these companies acquires MySpace from News Corp. Considering the relatively small price tag, it's a worthwhile gamble.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL, MSFT, GOOG over the next 72 hours.