When pundits think of what might be in store for Yahoo!, the options that come to mind are as follows:
- status quo
- merger with eBay
- acquisition by/merger with Microsoft
- taken private
No one really suggests that Google will and can buy Yahoo!, and that has a lot to do with the current breakdown of the search engine market space.
Any combination of Google with Yahoo! would yield a monopoly obstacle. Google’s 57.4% market share in search and Yahoo!’s 22.9% gives the Stanford alumni 80.3% market share in the influential search engine industry.
But, some dealmaking could make that a non-issue.
I’ve already argued that in many ways, Yahoo! being taken private would shelter it from envious investors that yearn Google’s faster growth rates. That would allow it to continue to throw off more cash and eventually be taken public again when online advertising is an ever bigger juggernaut.
But say Yahoo! chooses not to stay independent as a publicly traded firm or go private, the options remain sell to MSFT or merge with eBay. The objection that some people raised with MSFT remained conflicting cultures and Jerry Yang’s supposed disdain of MSFT products.
But what about Google?
Sure, the egos at Yahoo! might never allow this to happen, for Yahoo! was close to buying Google for $1B, or so goes the legend. But what if egos can be set aside and Yahoo! considered a $50B offer from Google. At a market capitalization of $160B, with $10B in cash, that gives Google a $150B enterprise value.
Of course the second issue is would Yahoo! stockholders accept a stock deal, since Google will have, after a $3.1B Doubleclick acquisition, about $7B in cash left.
Assuming there are no restrictions and Yahoo!’s shareholders can simply sell the Google shares shortly thereafter, then let’s assume that this would work as well. Moreover, one of the main arguments why Yahoo! shares are in the dumps, some would argue, is that Yahoo! shareholders suffer from Google envy. Mind you, as a Yahoo! shareholder, I’m not sure I’d prefer having Google at $150B than Yahoo! at $36B. But I also said that with Google at $30B, $40B… ok, this is painful, you get the idea.
So assuming Google offers and Yahoo! accepts a $50B deal, that means that Google/Yahoo! (I’ll spare you all the potential names for a combined entity) would have a combined value of about $200B, with Yahoo! shareholders owning 25% of the firm. Like I said, I’m not sure Yahoo! shareholders would accept this, but it is 25% of a $200B enterprise value entity, that with its roughly $10B in cash (Google would have $7B and Yahoo! $3B) would have a market capitalization of $215B…
That, I’m sure you noticed, would technically be pretty close to Microsoft’s $259B enterprise value (its market cap as of today is $285B).
Of course, how could this happen, given that a comined company with 80% market share would never get approval to merge, right?
Wrong.
Some objections: Yahoo! has spent a lot of time and money to build Panama. But the flip side is that Google’s monetization is currently at $0.11, compared to Yahoo!’s $0.04. Of course, on record: as a Yahoo! shareholder, I fully encouraged, encourage and will encourage Yahoo! to build and own its search business. I think any new media company who relies 100% on Google for search is foolish. But in the context of building a powerful combination that would get by legal scrutiny, if Yahoo! shareholders really wanted this to happen, they could simply sell its search business to someone else, be it MSN, who commands but 8.8% share, or even IAC (though I doubt it could afford it) or Time Warner’s AOL, which commands but 5% market share.
Bear in mind that in the wacky world wide web, sometimes some deals don’t really make sense strategically, they just are part of legacy deals, arrangements, etc. Example: Google owns 5% of Time Warner’s AOL, yet Time Warner’s properties CNN.com and SI.com have their search powered by Yahoo! In some ways, it makes total sense; in other ways, it’s banal.
Now, there are a couple of ways this can play out.
1- Sale of Ad Technology Platform only
In this scenario, MSN buys Panama and Google/Yahoo! continue to serve ads, but split it with MSN. The split could be 50-50 or even 100-0 in MSN’s favor, since MSN would need an incentive to buy only the IT and IP of Panama but not get to generate ads. This arrangement could wok in the short and mid term, eventually MSFT would want total control, but I could see them agreeing in order to get approval from anti-trust chiefs.
In other words, Google would use its ad server, its keywords of paid ads, etc., and since they yield 0.11 CPC vs. Yahoo!’s 0.04 CPC, it could work in that the total pie could somehow be bigger. Technically, if the 0.04/0.11 ratio is correct, then Google would be happy to take 36% of revenus vs. 64% for MSFT.
MSFT’s incentive here is to get search advertising technology to reinforce its adCenter platform and boost its search engine market share from 8.8% to 31.7%. Google would still have 57.4%, or 81% more. Combined with its 275% times higher monetization rate (0.11 vs. 0.04), that still gives Google a whopping lead.
The cost, of course, is that MSFT won’t own the ad inventory, only the IP/IT. In this case, would MSFT still pay $50B? Probably not. It could technically get a discount equal to Yahoo!’s search revenue, discounted by a rate for the cost of capital for the number of years this arrangement would be grandfathered.
This sounds counter-intuitive, but bear in mind that we’ve search many odd arrangement in the search engine business:
- the above-mentioned AOL/TW/Yahoo! situation where TW relies on Yahoo! to power its properties even though Google owns 5%.
- Google paying Ask Jeeves 110% revenue share to lock up the distribution deal.
2. Sale of Technology and Ad Business
This one is less interesting to Google and Yahoo! in that they give up both the ad serving technology and the 22.9% market share inventory that Yahoo! currently gets. In other words, indeed, Google wins Yahoo!’s display business, its email business, all of the bells and whistles, from Flickr, to Delicious, etc. In fact, this is akin to splitting up the Yahoo! asset into two, with the search business becoming either a) a smaller, stand-alone company or b) sold to someone else, notably MSFT.
Of course, Google does not acquire the 22.9% search volume, but at 57.4% and rapidly growing, it might think it’s worth it to give that up for a shot in the arm in the faster growing video and display ad business. Bear in mind that despite buying Doubleclick and YouTube, Google is still not well positioned in either the sale of either display or video ads. This is why we just wrote: What’s the missing piece of Google puzzle?
Oddly enough, anti-trust chiefs would see this as a boost for competition.
Google generates more profit in one quarter that Yahoo! did all year: Google netted $1B on sales of $3B in Q1 2007 whereas Yahoo! did $751M in all of 2006 (on sales of $6.4B).
That’s in total ad business, so imagine how much more revenue Google makes in search revenue than Yahoo! It could basically view this as an immaterial loss, especially since Yahoo!’s audience has a far lower propensity to search than Google’s does. I covered this here, and so did Microsoft’s Don Dodge here. Another reason why Google would live with this, frankly, is that people spend more time on Yahoo! than they do on Google, Paul Kedrosky looked at this, here.
Oh, there’s one more reason why Google would do this, naturally by foregoing the search business - be it tech alone or tech and media - Google could pay far less. How much of a discount?
Let’s see.
When Don Dodge stated that 1% market share is worth over $1B, I disagreed. After all, with its 22.9% market share, that would imply Yahoo!’s non-search business is worth but nearly $23B and the non-search business is only $12B (and if you rely on comScore, then it would be $26.4B for search and only $8.6B for non-search).
I did some number-crunching and projected Ask.com to be worth $3.15B. In that post, we also projected that Yahoo! commands about $750M for every 1% it holds, so times 22.9%, Yahoo! search business is a $17B business, meaning that the non-search business is an $18B business (Yahoo!’s enterprise value, once again, is $35B), so it’s a 50-50 split, almost.
Frankly, I’d value it at more, but bear in mind that most online business are actually worth more separate than combined once they’re developed. Case in point: IAC spun off Expedia for a reason, and we ran some numbers to suggest that News Corp.’s Fox Interactive Media was worth more separate than combined, and given the focus on MySpace, IGN should be spun off.
Of course, once we consider all of this, then in fact we’re splitting off Yahoo! into two: the search business gets effectively sold to Microsoft (for example) and the rest goes to Google.
So Google would in fact not have to pay $50B, but only $25B, and Microsoft would then buy the search business for $25B. Google could sell more stock, raise cash and make an all-cash offer, or Yahoo! shareholders can ask for a portion in stock or all stock. By now, frankly, we’re talking crazy.
This begs the question: would Microsoft pay $25B for Yahoo!’s search business? Would it pay $50B for the whole thing?
Doing the former means that they get Panama, an additional 22.9% market share but they’re still a far distance away from Google, who commands 57.4% and would now have the Yahoo! video and sales ad sales machine under its umbrella. At that rate, Microsoft might as well make a run for all of Yahoo!, even though that creates some redundancies and doubles the financial risk.
Of course, for the former to materialize, that would mean that Google would want Yahoo! so bad (to get into the sale of video and display, reinforce its market share in email, double up ad inventory, get its hands on all of Yahoo!’s properties and assets etc.) that it would let the search IP go to MSFT or remain independent as a smaller, search player.
All of this is unlikely, admittedly, but when Jerry Yang and Yahoo!’s Board reads this, they suddenly realize the plethora of choices that present themselves to the company.
Disclaimer: Long Yahoo! stock.
Subscribe:
September 20th, 2007 at 11:09 pm
[…] Ashkan Karbasfrooshan did the math. […]
September 22nd, 2007 at 4:08 pm
Everyone talks about a tech company like Google or MSFT buying Yahoo!, but why does nobody talk about a media company? Imagine if Yahoo! and NBC merged.
Would it be as big a debacle as the AOL/TimeWarner deal? Maybe, maybe not, but there’s some precedent for that sort of thing.
September 7th, 2008 at 8:55 am
[…] - Can Google Buy Yahoo!? […]