DoubleClick Acquisition: Google Heads Microsoft Off At the Pass

Includes: GOOG, MSFT
by: Ashkan Karbasfrooshan

When I wrote that Microsoft (NASDAQ:MSFT) won’t buy DoubleClick (DCLK), I was right. But I was wrong when I thought that Google (NASDAQ:GOOG) wouldn’t, because that would cause a publisher flight.

An ongoing theme pertaining to Google has been its desperate desire to diversify revenue streams. We recently talked about how Google is not looking for traffic, but rather, ways to monetize its traffic. And since the next wave of growth is display/banners at the expense of video (and the one after that being video), Google did not apparently blink today, spending twice what it spent on YouTube to keep DCLK out of the hands of MSFT.

“Keeping Microsoft away from DoubleClick is worth billions to Google,” an analyst with RBC Capital Markets, Jordan Rohan, said. Indeed, MySpace got $900M in an ad deal, and this $3.1B deal is the price to pay to maintain Google’s lead online, I presume.

As Om Malik states: “the amount Google spent is shade under Google’s revenues in the fourth quarter of 2006 ($3.21 billion) and what the company earned in entire 2006. At the end of 2006, Google had $11.2 billion in cash.”

While many folks will rush out and say this is a brilliant deal (and frankly, from a defensive, Monopoly-money using perspective, sure it is), I personally do not see this being a wise, long term investment… the publisher risk is enormous, in my humble opinion. But then again, as the line between search and display advertisers gets blurry, offering a one-stop solution is in theory a good one:

Or better yet, this graph I found on Business Week via B2.0 when asked “Which medium will represent the largest percentage increase in spending this year for your brand (or your top client)?”:

That says it all.

Of course, when most banks merged to offer that to clients, we learned, it was not sound. Furthermore, many media firms that did just that also learned the hard way that this does not always work in practice.

But when you have over $10B in cash and securities and a market cap of $145B - much of which is hinged on growth, then cost is secondary.

GigaOm looked at the year-by-year appreciation of Google’s stock price:
  • 2004: Up 126.8%, from the offering price of $85 to $192.79.
  • 2005: Up 115.2% to $414.86.
  • 2006: Up 11.0% to $460.48.
  • 2007: Up 1.5%, as of April 12.
  • Google, which joined the S&P 500 a little more than a year ago, has since failed to outperform that index: The S&P 500 returned 16.5% in 2006 and is up 2.1% this year.

    But do ask yourself this: YouTube got $1.65B in stock, DCLK got $3.1-3.3B in cash. Of course, private equity financiers prefer cash… and DCLK could parlay MSFT against GOOG to get cash, but what does that say about the likelihood of this deal really being accretive for Google? I don’t think it will, no matter how large display/banner ads are.

    In fact, just earlier this week, Eric Schmidt said that if given the choice, Google would prefer building solutions in-house than buy them… yet they pull this deal?

    Is Google desperate, or is DCLK such a great deal? One thing is for sure, the blogosphere will be talking about this for a while, and great arguments will be made on what this means for Google, MSFT, Yahoo! and the industry in general.

    It’s also breathtaking how much things have changed, between 1994-2000: DoubleClick was synonymous with online advertising, then it got out of the advertising network business for technology. Today, Google is synonymous with online ads… even though, as Business 2.0 reminds us:

    Here’s the grand irony, though, that the Times missed.

    Google is spending a mere 2 percent of its $145 billion market cap on DoubleClick. But at one point, Google was counting on the much-mightier DoubleClick for its survival. When Google launched AdWords, even its founders had doubts that the newfangled advertising system would work. Sergey Brin once told Business 2.0 columnist John Battelle that if AdWords failed, he and cofounder Larry Page figured they could swim to DoubleClick as a “life preserver.”

    A more global theme I’ve covered here is how large new and old media, as well as technology companies essentially keep prices of startups and valuations of these high by bidding for assets to keep them away from one another.In other words, Google recognizes that it’s a vicious cycle, they need growth to maintain their stock price, and so long as the multiples on their earnings and growth are healthy, they can afford to pay anything to keep MSFT (and Yahoo! (YHOO) ) at arms’ length.

    DCLK generated about $300 million in revenue last year, mostly from providings ads on Web sites, so it got 10 times revenues which is very healthy, especially when you consider that after being bought for $1.1 billion by private equity firms, it sold off a couple of assets to net these $535M. In other words, Google needs to ask itself what it paid $3.1B for?

    Don’t get me wrong, Google is laden with smart people, but after acknowledging that billion dollar acquisitions for dMarc and YouTube are not as synergistic as they would have hoped, I am, frankly, shocked by this news!

    Naturally, Yahoo! did not need to partake in this deal, since they have a more healthy display/banner business… but MSFT - that has been trying to get into this game - now feels like a distant competitor in the online advertising war.

    Here’s how Google - whose stock is down less than 1% after announcing the deal - is spinning this, according to Google’s own press release, and paraphrased by

    – “For users, the combined company will deliver an improved experience on the web, by increasing the relevancy and the quality of the ads they see.
    – For online publishers, the combination provides access to new advertisers, which creates a powerful opportunity to monetize their inventory more efficiently.
    – For agencies and advertisers, Google and DoubleClick will provide an easy and efficient way to manage both search and display ads in one place. They will be able to optimize their ad spending across different online media using a common set of metrics.”

    All to say, it’s a great time to be in new media, I’ll tell you that.

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