Allow me to preface this exercise in insanity by saying this will probably never happen, but after reading Merrill Lynch’s analyst suggest that MSFT acquires Yahoo!, I thought it might be interesting to at least examine the more realistic likelihood of Google merging with Yahoo!
Note that I use the term merging and not buying because Mr. Filo and Yang, whose company’s brand became synonymous with the Web, would probably only entertain a merger, and never a sale. Mind you, I know what you are thinking, Google is worth 3 times more than Yahoo! - so wouldn’t any hookup be a sale? No, that’s where you are wrong.
You see, culture is the most important factor in any merger and acquisition. Market share can go up and down, product lines morph over years, management comes and goes, but culture, while fluid and changing, is essentially one and the same from the day a company opens its doors.
Google and Yahoo! are far more complementary than competitive; more importantly, while their cultures are not perfectly aligned, they are in sync. For starters, Filo and Wang went to Stanford, as did Google’s Sergey Brin and Larry Page. Both Filo and Wang have yet to return to finish their PhD’s, ditto Brin and Page. Yang was born in Taipei, Taiwan, Google’s Brin was born in Russia. Yahoo!’s Filo and Google’s Page were born in America…
Put Page, Filo, Brin and Yang in a room and all of those things is a bit like the other…
Put Page, Brin, Yang and Page in a room with Bill Gates, Steve Ballmer and yeah… two of those things are not like the others.
Also:
Google and Yahoo! are all about the Web, MSFT underestimated and undervalued the Web until it had change its mind because Netscape was dominating browsers.
Google and Yahoo! have search as the central core of their DNA; MSFT underestimated and undervalued search until Google dominated search. You see the pattern folks?
Onto financials: yes, Google is worth 3 times more than Yahoo!, but the fact of the matter is that in 2005, Google generated $1.465 billion in net income off $6.1 billion in revenue; Yahoo! generated $1.9 billion in net income off $5.2 billion; mind you, Google’s growth has been much faster, but Yahoo! is about 5 years older. Also, Yahoo! has a diversified revenue stream, Google is a one trick pony. Its shareholders are nervous about Google’s lack of diversification.
The point is that Google and Yahoo!’s founders would look at the stock price but I think - and this is 100% guessing - that they will let factors other than stock price dictate the details of the deal. And Lord knows that the devil’s in the details.
More importantly, Yahoo! is stronger in display ads, Google in search ads. Since non-search advertising is set to grow faster than search advertising in the next 5 years, Yahoo! has some leverage over Google here.
Also, when the companies say that Yahoo! is a media company, Google is a technology company, it’s more than rhetoric, it shows that each property is taking a distinct approach and together the sum of the parts could really be a lot more powerful than either one could individually.
Oh, both companies do consider MSFT to be a threat: Yahoo! in the sense that MSN.com is a direct competitor of Yahoo.com; Google in the sense that MSFT’s search is gunning for Google. But while Yahoo! has played it coy by not taking MSFT on directly, Google has decided to fight fire with fire. This, in fact, could be a potential deal breaker if and when Google and Yahoo! talk… but the fact of the matter is that a combined Google and Yahoo! would be the most formidable machine in new or old media, content or technology industries.
Of course, because the stock market is the determing factor in the financial engineering, this deal will probably not take place because as it stands now:
Google’s market cap = $120 billion
Yahoo! market cap = $40 billion
Combined value = $160 billion
(It would not be this straightforward, there are cost savings to account for, overlaps, synergies etc., I am watching France vs. Togo so if the numbers are off and this seems over-simplified, please forgive me),
Combined 2005 Revenues: $6.1 + $5.2 = $11.3 billion
Combined 2005 Income = $1.465 + $1.9 = 3.265 billion.
Off a value of $160 billion, assuming this company has about $15 billion in cash and thus an enterprise value of $145 billion, that means a Price/Sales ratio of 14 and a Price/Earnings ratio of 50… rich mind you, but for that kind of an entity, shareholders would pay quite a bit.
The question is: would everyone’s egos at Yahoo! allow them to earn 25% in the new company while Google’s shareholders own 75%?
And… would the government allow one company to control 48% + 28% = 76% of all searches?
Who knows… Of course, we’re just speculating…
Note I own shares of Yahoo! and MSFT.
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