I’ve been extremely harsh on Yahoo! As a shareholder, I sometimes wonder what I was thinking when I did not sell my holdings and short the stock when the last merger rumor with MSFT sent the stock soaring to $33 (valuing the company as a whole at over $40B, whereas it’s now back to $30B).
Today Yahoo! bought one of the favorite online ad networks: Blue Lithium. I could get all technical and outline all of the wonderful things that Blue Lithium does well, but the simple way to put it is Blue Lithium has some interesting click-stream targeting capabilities and its inventory of advertisers doesn’t suck ass. I wish there was a kinder, nicer way to put it, but while many ad networks make oodles of money running “Press the Fart Button” ads and “Punch the monkey” banners, Blue Lithium has built up a business - today valued at $300M by Yahoo! - by connecting audiences with marquee advertisers.
You might notice that on WatchMojo.com, we don’t run any ad networks. We run our advertisers’ ads and to fill the inventory, we run house ads. In the past, before we opened the site up to advertisers, we ran Blue Lithium, albeit briefly.
Today Yahoo! extended their reach on the Web by adding Blue Lithium, the fifth largest ad network, but one of the more distinct ones. According to their blog: Yahoo!’s reach now includes inventory on Yahoo!’s owned and operated properties, its affiliate network (partnerships with eBay, Comcast, and the consortium of nearly 400 newspapers), the Yahoo Publisher Network, and the Right Media Exchange.
Yahoo! got a bargain, too, not so much economically as it did technically. For one, an earlier Business 2.0 article from pegged 2007 revenues at $100M. I discounted a 2006 revenue figure to be $70M.
I have no idea if it hit its 2006 or will hit its 2007 figure, but when I ran the numbers previously, I estimated Blue Lithium to be worth $427M (scroll down to the last part, or read the following excerpt):
According to a Business 2.0 story, BlueLithium has been profitable since its third month of operation and is on track to hit $100 million in revenue by the end of next year, 2007.
I am just guesstimating the following numbers:
If the 2007 $100M revenue figure is right, assuming a 40% growth rate then 2006 revenues for Blue Lithium are probably in the $70M range.
[note: using that 8 billion impressions / month figure in the same Business 2.0 article, and assuming the company makes $1.50 CPM gross, that equals to a monthly revenue of $12M, or $144M in revenue already this year, which is 44% higher than what CEO Gurbaksh Chahal says the company will make next year! So, is something off? No, the article says that Blue Lithium serves 8 billion impressions per month but Blue Lithium serves both CPM and CPC impressions, so not all of those impressions are sold on an impression basis. This is the only rational explanation we can think of to reconcile the numbers.]
Project a profit margin of 20% (it seems to be growing rapidly - thus hiring a lot - and has a higher than average R&D cost compared to its peers), then its earnings are $15M. Valueclick’s margins were 18% and 13% in 2004 and 2005 respectively, according to Google Finance, but since Valueclick is publicly traded and undertaken many acquisitions, I project them to have endured a lot of administrative costs that privately held Blue Lithium had not had to.
Valueclick boats a P/E of 38 (according to Yahoo! Finance), Blue Lithium grows faster but is privately held, so assume a 25% liquidity discount - thus a P/E of 75% x 38 = 28.5 times profits… and:
Blue Lithium right now could be worth $427M.
Blue Lithium’s sale for $300M is a bargain when you consider that:
- Doubleclick sold to Google for $3.1B
- MSFT bought aQuantive for $6B
- WPP bought 24/7 RealMedia for $680M
- Yahoo! bought the 80% of Right Media it did not own for a valuation upwards of $800M
- AOL bought Tacoda for $250-300M
Bottom Line: Google is the Loser, Here
The thing is though, this highlights, more than ever, the dynamics of demand and supply and the art of matchmaking in mergers and acquisitions. Sure, Blue Lithium was a catch, but there remain hundreds of online ad networks, with Tribal Fusion now creeping up as [probably] the most sought after private ad network around. Valleywag would suggest Ad Brite is worthy of that claim…
Regardless, as DCLK, AQNT, Right Media and Tacoda (this one is different as a behavioral targeting network) were taken off the market, what happened is that the number of takers was reduced drastically, meaning that there were less dance partners. In other words, clearly, the winner of this dance was aQuantive, who leveraged Google’s rich - and somewhat confused - acquisition of DCLK to strike rich (disclaimer: I owned shares in aQuantive). The irony, frankly, is that Yahoo! gets a bigger laugh, from day 1, Blue Lithium has represented the best fit for Google. Let’s go back in history in my first post on the dynamics of the online ad network industry:
Of course, with a CEO as ambitious as founder Gurbaksh Chahal, Blue Lithium’s future is bright. How many CEOs in online advertising do you know who openly mock Google?
“They’ve miserably failed in the last year with display ads,” he notes, “because they look at the world through text advertising.”
Indeed, Google should have bought Blue Lithium, not Doubleclick, and ultimately, the anti-trust feds might block that deal, too… meaning that Yahoo! and Microsoft have somewhat inadvertently managed to derail Google’s plans for world domination in this game of musical chairs.
The Winner? No doubt, Yahoo!
In one transaction, Yahoo!
- massively extends its reach by adding 145M unique users (sure, there is duplication, but in what acquisition made by Yahoo! will there not be duplication?)
- eliminates a competitor. Yahoo! after all had become a network with the deals with eBay, Comcast etc., not to mention the Right Media deal. While Right Media provides a fantastic auction platform to spike CPMs for Yahoo!’s long tail ad inventory, Blue Lithium connects marquee branded advertisers for whom an additional $0.10, $0.20, or $0.50 CPM is immaterial. That might not mean much, but over billions and billions of ad inventory that Yahoo! has and does not sell, you will start to see an accretive impact shortly.
I think this deal reflects Google’s need to develop a softer image. It has decided to compete with everybody, all the time, everywhere, and sooner or later, a group of very able competitors will band together and counter Mountain View with something potent.
Mind you, Venture Beat has a good point, the real winner, clearly, are Blue Lithium’s CEO and its financial backers, who only invested $11.5M:
This was a very fast ride for BlueLithium, only three years old. Venture firms WaldenVC and 3i are believed to have done particularly well from their early investment in the company in February 2005. They invested $11.5 million.
Can Google Be Check Mate in Display / Banner Ads?
Right now, Sergey Brin, Larry Page, Omid Kordestani, Eric Schmidt and company and finding themselves nearly checkmate in the display business: there is no guarantee that they will be able to buy Doubleclick, and they cannot move to buy another ad network. Sure, in online video they are well positioned to destroy the market, but despite all of the hoopla surrounding online video, display/banner advertising is something that Google needs to harness and master to keep investors happy, and right now, I reiterate: I am much more comfortable being long in Yahoo! at $30B with its online reach, diversified product line and revenue streams than being long in Google at $160B with 99.9% of its revenues coming from AdSense.
Related: Missing Piece of Puzzle in Google’s Quest for World Domination?
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