Monday, April 16, 2007

Google DoubleClick deal common sense behind the hype

In order to understand the magnitude of "overreaction" to threat of losing DoubleClick to competitors which resulted in a price tag of 3.1 billion cash offer from Google I would like to run few parallels. It is estimated that Double click had roughly 150 million in revenue last year as reported by Wall Street Journal. So Google is paying 20.7 time sales of the company. Google itself is valued at the moment as Price/Sales=13.67, Yahoo! P/S=6.63, MSFT P/S=6.01, so Google is paying premium of 51% for DoubleClick above its own exaggerated valuation which is 106% higher then nearest competitor. By making payment of 3.1 billion dollars and buying company with 150 million dollars in revenue Google will lose interest income in the amount of 161.2 million dollars per year assuming investing in money market funds at 5.2% p.a. Most importantly Google is spending almost 30% of available at the year end 11.2 billion dollars. With flat free cash flow (1.678 billion dollars in 2006 Vs 1.621 billion dollars in 2005, operational cash flow actually decreased by 9% in Q4 2006 from Q3 to 0.911 billion dollars) and still pending lawsuit of 1.0 billion dollars there is not so much money left to fight competition war against Yahoo!, Microsoft and Old Media Guys. With effect of "law of big numbers" right around the corner slowing growth rate will become apparent even to most devoted Google followers, inability of "technological" company to create any new products and monetise already made investment in YouTube should ring alarm bells for any investor.

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