Is DoubleClick a Smart Buy for Google?

Google Inc. (NASDAQ: GOOG) purchased DoubleClick for $3.1 billion in cash from San Francisco-based private equity firm Hellman & Friedman along with JMI Equity and management. Google is one of the Top 20 Innovators of The Innovation Index.

According to Google Press Release

"The combination of Google and DoubleClick will offer superior tools for targeting, serving and analyzing online ads of all types, significantly benefiting customers and consumers:

-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."

According to Marketwatch story, "DoubleClick had been the subject of speculation about a possible acquisition. In late March, the Wall Street Journal reported that DoubleClick's owners were entertaining offers in the range of $2 billion from a handful of companies, including Microsoft."

Why would Google pay such a steep price for DoubleClick when DoubleClick was having revenue of only about $150 million in all of 2006 and was unprofitable as of April 2005? The acquisition puts DoubleClick's valuation at an astonishing and unheard of 20.66 times gross revenue. In comparison, Google's valuation is 13.7 times 2006 gross revenue. At 13.7 times gross revenue, DoubleClick would have been worth just over $2 billion. Compare this to recent acquisition of WebEx Communications (NASDAQ: WEBX) by Cisco Systems, Inc. (NASDAQ: CSCO) worth $3.2 billion, or 8.4 times 2006 gross revenue. The acquisition also puts tremendous pressure on Google's cash reserves that will deplete from $3.54 billion as of Dec. 31, 2006 to only $440 million. This means Google will not be able to invest freely in people and resources during all of 2007 and possibly 2008, until it rebuilds the cash reserve.

When Google CEO Eric Schmidt was asked about the large price being paid for DoubleClick in the conference call, Schmidt stated: "Google's board of directors felt after a detailed financial analysis (that) it's a very good deal for Google and our shareholders."

Bottomline:

Simply put, DoubleClick's innovative technology and ad platform provides Google an ability to provide display ads from agencies and advertisers. DoubleClick provides a ready-made platform, advertisers and agencies, publishers and relationships that have taken over ten years to build. However, some of these relationships could churn after Google completes the acquisition (case in point, YouTube acquisition and Viacom).

With Google's muscle power and market leading AdWords and AdSense platform though, DoubleClick business will see an incremental growth of possibly 50% to 100% year-over-year in the near future. At least this would be the expectation from Google Board.

This means, Google will see potential incremental revenue of $225 million to $300 million in 2008, $390 million to $520 million in 2009, and $675 million to $900 million in 2010 - so in essence, Google is paying about four times optimistic 2010 potential revenues through DoubleClick acquisition. Is Google being a bit carefree with the cash and money in the bank it has generated with the core business? Or is Google being bold and bullish by staking a key position in online display ad business? Should Yahoo! worry even more about Google? Why wouldn't Microsoft, AOL or Yahoo! pay $3.1 billion for DoubleClick, much less even $2 billion? It appears that a bidding war ensued between Microsoft and Google, and Google rolled the dice and placed a huge bet - perhaps Google did not want to come second in this particular bidding game. Microsoft could have benefited more from the acquisition. However, Microsoft must have found the price tag a bit too much to swallow, and decided to bow out.

On the other hand, DoubleClick acquisition is much closer to the core online Ad business that has made Google. It provides Google a real play against Yahoo!. And Google has the potential to further its marketshare in search advertising through inroads in display advertising. It also means that Google couldn't build out a display ad platform to rival Yahoo! within a given time and budget, and hence chose the acquisition route. Only time will tell on whether Google's lofty acquisition of DoubleClick for $3.1 billion is a Smart Buy. For now, the Google investors could be wary with all the questions, and may prefer a "wait-and-watch" mode until the dust settles. On the other hand, DoubleClick investors are having a big ball.

Cisco Betting BIG with Purchase of WebEx

Cisco Systems, Inc. (NASDAQ: CSCO) today announced the acquisition of WebEx Communications, Inc. (NASDAQ: WEBX), the leader in web conferencing, for $3.2 billion - or 7 times WebEx projected revenue of $457 million in 2007. Cisco is betting big with this acquisition on the potential upside in web and video conferencing revenue in the unified communications market space. Cisco is also countering Microsoft's advances in the unified communications market.

Cisco is one of the top 20 innovators of The Innovation Index.

WebEx Revenue Machine


Although the WebEx year-over-year revenue growth is hovering around 20% in the last couple of years, the total revenue growth of WebEx has been solid over the last five plus years. Cisco must have looked at the total revenue growth, and the available market in the next five to ten years in providing such a generous valuation to WebEx. Whereas the total revenue growth of WebEx looked good, the net income was another story:





The WebEx Net Income has been steady around $50 million for the past three years. Of course, Cisco must have considered the lack of net income growth owing to WebEx investing into the overall revenue growth.

Cisco Telepresence and WebEx Collaboration

"We have a lot of strength in voice and video, which we think can help to improve their user experience," Cisco Chief Development Officer Charlie Giancarlo said in an interview today.

Cisco introduced perhaps its biggest innovation of 2006, the Cisco Telepresence, a new technology solution that provides brand new in-person experiences between people, places and events whether they are across town or across the world. However, not all companies can afford Cisco's Telepresence; in particular, the SMBs, and departments of larger companies. For these companies, the WebEx solution of web conferencing and collaboration will be more economical and will see greater adoption. There was also a deeper problem and product gap with Cisco Telepresence: Context and Collaboration. The large company customers want to do more than simply hooking up the Cisco Telepresence gear and participating in full motion video conference - these customers want to collaborate. This was perhaps the biggest weakness of Telepresence. Now, Cisco will be able to provide a comprehensive solution to its large customer base with WebEx Collaboration built into the Telepresence. The WebEx Collaboration suite will provide context to Cisco Telepresence solution. In turn, Cisco Telepresence will see far reaching adoption in the larger corporate market, and the resulting upside in revenue.

Giancarlo had said in December, 2006 that Telepresence may be the quickest Cisco product to reach $1 billion in annual sales. Now, Giancarlo is about half way there with the acquisition of WebEx, and if Cisco is able to fully exploit the WebEx Collaboration solution, Giancarlo will reach there sooner.

WebEx Telesales and Web Sales

What the various press releases and announcements have not talked about is the strength of WebEx Telesales and Web Sales machine that Cisco is acquiring. Led by David Berman, the worldwide VP of Sales and Service, the WebEx Telesales and Web Sales team is a selling machine. Cisco can definitely benefit from the sales process and the sales factory that David Berman and his team have developed at WebEx. If Cisco wants to win in the SMB market with the SaaS (Software as a Service model), WebEx will be able to provide Cisco the necessary framework and the model. And if Cisco is able to replicate this and grow this model further, Cisco can reap a potential windfall which will be greater than the stated acquisition cost of $3.2 billion.

Bottomline

Subrah Iyar and Min Zhu founded WebEx in the mid nineties. Their vision was to grow WebEx into a billion dollar revenue enterprise - although WebEx market cap grew to over one billion dollars, the revenue were about half way to the billion mark. Could Iyar, the current CEO, have taken WebEx to billion dollars in revenue? Possibly. Why would Iyar sell WebEx now after going through the pain of growing the company to $100 million, and then to almost $500 million? Perhaps ten years plus in growing a company becomes tiring, and the challenge of growing a business versus creating new products becomes monotonous. I am sure we have not seen the last of these entrepreneurs though. The WebEx investors, stock holders and employees are rejoicing today on the big acquisition and the upside on their stock valuations.

References:

Bloomberg