Did Google Over-pay for DoubleClick?

There’s a great truism about mergers and acquisitions, that a company is worth as much as someone is willing to pay for it. So is Google’s news that it intends to splash around $3.1bn in cash to acquire DoubleClick, the great granddaddy of the banner ad industry, yet more evidence of over-exuberance in this space or is it a fair premium?

Certainly the asking price, widely believed to have been pushed up by competing bids from Microsoft, gives over a 200% return to the financiers who took DoubleClick private in a $1.1bn deal two years ago.

And since DoubleClick’s financial position is not a matter of public record, and executives from both firms would not reveal this information, it’s difficult to tell how much of a premium Google is prepared to pay.

In its last-reported quarter, the period to March 31, 2005, DoubleClick saw a loss of $534,000 on revenue of $76.3m. If one were to assume no growth over the intervening two years, that would mean Google is paying roughly 10 times annual revenue for the company.

But DoubleClick is actually a much smaller company than the one acquired in 2005. Having narrowly squeaked through the dot-com bust, the firm struggled before being taken private by Hellman-Friedman, a San Francisco private equity firm, in a $1.1bn deal back in April 2005. But Hellman-Friedman has sold off two of its units for over half a billion dollars since taking the firm private.

On the other hand, it’s pretty clear Google has paid a huge premium to keep DoubleClick out of the hands of rival Microsoft, which was first tied to the acquisition rumours at a $2bn price tag that at least one Microsoft executive scoffed at as being ridiculously high.

But I come back to the point that price-sales multiples and P/E ratios are all very well, but a company is still worth what someone is willing to pay for it.

As David Bradshaw, Principal Analyst at Ovum (an analyst firm owned by this publication’s owner, Datamonitor) puts it: “Much of the analysis has focused on just how much Google is believed to have paid for DoubleClick, with many commentators saying that Google has overpaid. We disagree. Advertising is where the overwhelming majority of Google’s revenues come from, and will continue to do so for the foreseeable future.

“Firstly, by keeping DoubleClick out of Microsoft’s hands, Google keeps Microsoft out of its back-yard,” Bradshaw said. “Secondly, DoubleClick’s display advertising expertise complements Google’s existing business. If there is any company that can boost DoubleClick’s revenue, it is Google. Google is currently cash-rich so spending $3bn to further both these aims seems well worth it.”

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