Google Gone Mad
By admin | October 10, 2006
By Mike Myatt, Chief Strategy Officer, N2growth
I don’t normally comment on M&A transactions but every now and then a deal comes along that I just can’t resist. Ok, I can understand Google’s desire to make a bold play in the social networking arena, and after all, YouTube is one of the most visited sites on the Internet…But a $1.65 Billion dollar acquisition price for a 19 month old company? Please say it ain’t so…Am I the only one who remembers the irrational exuberance, crazed acquisition binges and ridiculous valuations of the dotcom era? If after reading the text that follows you don’t have a massive feeling of deja vu you may want to go back and study your history…
I am a big fan of growth by acquisition with one caveat…that the acquisition makes sense. Let’s examine the pros and cons of this transaction and you decide for yourself whether or not Eric Schmidt, CEO of Google is a brilliant visionary or whether he has drunk the I’m going to conquer the world Kool-Aid.
Pros:
- As mentioned above YouTube is one of the most visited sites on the Internet (Alexa ranks YouTube #10) and this gives Google the ability to spread the AdSense footprint. More revenue is not a bad thing…
- Also as mentioned earlier this is the big splash that Google was looking for by way of making a meaningful entry into the social networking market. While Google has been the search engine of choice for most of the professional world, MSN, Yahoo and AOL have consistently done better with the younger demographic than Google has. Google not only gets bigger with this play, but they get younger…
- A case can be made that this acquisition is a great defensive move disguised as an offensive play. Yahoo was in the hunt for YouTube and what would have happened if Microsoft or AOL had made the acquisition? There is always something to be said for protecting your flank…
- While not necessarily a pro for Google this is a win for social media sites in general and my congratulations go out to Chad Hurley the 29 year-old CEO of YouTube and the balance of YouTube’s employees and investors.
Cons:
- Google is cannibalizing one of its own business lines with the YouTube acquisition. Google Video was #3 in market share for the online video audience prior to the acquisition. What could Google have accomplished with a similar investment into its own platform? I guess we’ll never know…
- Can you say huge risk? Intellectual property violations are no small matter and with recent news that more than 60% of the content on the most-viewed page of YouTube was uploaded illegally, the costs of defending the daily lawsuits and threats of litigation could be staggering.
- If this was a defensive play, was it a good one? Yahoo and Microsoft can acquire fast-followers at significantly lower costs making rapid gains on Google while its busy dealing with the distended stomach pains of the YouTube acquisition…
- But what about the site traffic you ask? I certainly acknowledge the validity of traffic as a measure of online success, but in and of itself traffic will not create sustainability. I can cite numerous examples of highly trafficked sites, purchased at huge valuations during the dotcom era that either no longer exist or are worth only a fraction of what they were purchased for. It takes more than traffic to be viable over the long-term.
- Let us not forget about the advertising revenue…I’m not so sure that I agree with the business logic being espoused by Google. I believe it is very likely that a huge influx of advertising may actually be dilutive in that it may drive the current audience away from YouTube towards other services much like what is currently happening over at MySpace.
- OK, sooner or later we have to talk about valuation metrics…While I must admit to being a valuation traditionalist who likes to make accretive acquisitions, I can’t make this deal pencil regardless of how liberal I get…The amount of revenue growth that would have to occur in a reasonable time frame to make even the most modest of hurdle rates is really inconceivable. You can make any argument you desire but it is impossible to justify a $1.65 Billion dollar acquisition for a company producing less than $4 million dollars in annual profit.
My personal opinion is that Google has become far too fractionalized in its approach to the market and many of the things that made it great have been lost in the wake of chasing world domination…Google’s search product is no longer the best available (I have been using Ask.com for more than a year now as they produce more relevant returned searches and offer a broader array of search tools) and I believe once all the dust surrounding the hype settles this transaction will eventually become a case study for how not to acquire companies. What say you?
Topics: Blogging & Social Media, Financing - M&A, Miscellaneous, Technology |
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