This isn’t your father’s Microsoft, let me tell you.
Since Ray Ozzie has come on board: MSFT has changed its tune.
I understand Google is powered by Linux, but times have changed.
Microsoft is so big in software that it is now looking at gaining market share in media and advertising, to do that, it understands that it must lose some battles to non-Windows platform (or non-Office environments, for that matter), to win the long term war: to be as dominant in advertising as it has been in software.
As technology migrates to the clouds and the lines between software and media blur, business models become increasingly advertising-supported.
As such, the long term war is over advertising revenue and not licenses and subscriptions. The 1990s were the age of the PC and MSFT understood that hardware was a commodity but software provided infinite profits. It won that battle.
The 21st century’s first half will be about users migrating to the Web, advertisers following it, and the inefficiency between attention and spending will create abnormal profits.
For MSFT to remain MSFT, it needs to win in advertising. Over the last 10 years, its sought to do that alone, occasionally via partnerships (with NBC on MSNBC, for example). More recently, its tried to do it via acquisitions:
- Last year it plunked down an 85% premium to acquire aQuantive for $6B (we owned the stock, thanks MSFT).
- This year, it launched an unsolicited 60% premium for Yahoo! (we owned the stock, as well, thanks MSFT, again).
Yet, Yahoo! has worked very hard to fend MSFT back. In fact, if only Jerry Yang and Sue Decker worked half as hard for shareholders as they are doing for themselves to retain control, this would all be moot. I’ve since sold a good chunk of my shares but always maintained that the deal would get done, and at $50B. But as economic conditions change and Yahoo! risks bombing 2008 Q1, some wonder if $31/share is all it will take to acquire Yahoo!
We shall see. Yahoo! has been so ungrateful and childish that maybe MSFT should send it a message.
So I wonder: with the conditions on the ground changing, should Microsoft make a competing, parallel offer for Google to give 0.5 share of MSFT for every 1 share of Google?
THE TALE OF THE TAPE
Google commands a market capitalization of $137B. Google has over $15B of cash and no debt on its balance sheet, so it has an enterprise value of $122B.
Bear in mind, its market cap was well over $225B in November 2007. Yes, Google’s growth has slowed down, but its core business and long term prospects have not really changed. I’d say investors have simply become more realistic and less risk averse. In fact, a lot of the early buyers of Google stock have long cashed out, I believe. A lot of the holders right now have bought in over the past couple of years, meaning that their holdings remain under-water. Reading some comments on message boards, I suspect many wonder if we’ll ever see those pre-2008 levels again.
Microsoft, meanwhile has a market cap of $260B and with $20B in cash it has an enterprise value of $240B. So basically, MSFT is worth twice as much as Google.
Toss in a premium and you’ve got a deal whereby every 3 shares of Google fetch 2 shares of MSFT. Last year, such talk was lunacy… what with Google doubling every month and MSFT remaining in neutral. But last year was last year and this year is this year. Mind you, two years ago I asked “by 2010, will Googe be worth more than MSFT?”
Google did $17B in sales in 2007; MSFT did $60B. MSFT generates over $17B of free cash flow per year.
Back in Q4 2007, Google was worth $200B, but MSFT too was higher; at that time, MSFT was worth 1.5x higher than GOOG.
But once Google announced its 2007 Q4 results and growth had fallen precipitously, the pace of insider selling accelerated. More importantly, with comScore showing that Google’s paid clicks are stalling in January and February 2008, many fear that Google’s stock might see the $300s before seeing the $500, $600 and $700 barriers any time soon.
In this context, if MSFT offered to merge/acquire with Google, how would Google investors really feel?
Some things to consider:
- Massive Insider Sales Suggest Bearish Outlook by Googlers
Diversification is one thing, but how come no Googlers are holding onto shares for any long period of time?
- Yahoo! and Microsoft have more overlaps than Google and Microsoft.
Yahoo! Mail is tops, Hotmail is rarely used. Gmail gets a lot of glowing reviews but market share wise it’s not exactly a category killer.
MSN Messenger and Yahoo! Messenger? Ditto. Gmail Talk. I use it, but most people don’t. AOL’s AIM is the leader.
In display/ad sales, Yahoo! is the leader, MSN does well but lacks real reach, Google is nowhere to be found.
There are some overlaps in ad serving, granted, Microsoft owns aQuantive’s Atlas DMT and Google just bought Doubleclick, whose DFP platform is widely used. But who cares: both will eventually see margins and market share erode.
Ad serving has nothing to do with media per se, it’s all about software.
- Microsoft and Google’s Culture is More Similar than Microsoft and Yahoo!
Yahoo! has lost the fire in its belly. For years, I held the stock, not because I thought Yahoo! had the stamina and drive to compete in the marketplace, but because as the world’s biggest new media company, it was a prime acquisition target.
Yahoo! does not strive for world domination: instead of building its own search, it showcased Google’s search. Yahoo! paid Right Media $45M for 20%… built it up, then bought the remaining 80% for $680M (what were they thinking…)
Microsoft is all about dominating, as is Google. Google and MSFT’s means to their end is very different, but their belief that they should own everything they touch is actually very common and similar.
Google wants to own the advertising process even though it only owns the Web portion (and even there, it only owns the search component, it has yet to prove itself in display, video, classifieds, etc.)
Microsoft owns the PC and wants to own the Web.
That trait is nowhere to be found at Yahoo.org, I mean Yahoo.com.
- Outlook for Business vs. Outlook for Stock
But here’s the clincher: no one doubts that Google as a business will be bigger in 3 to 10 years, but as a stock, will it really be at $200B anytime soon, let alone ever cross $300B? $400B? $500B?
Microsoft, after all, has generated more and more revenues and profits but its market cap is nowhere near its peak. Why would Google be immune to the laws of gravity and the laws of big numbers?
- Little to Lose
Nothing will make YHOO change its tune faster than seeing its stock fall back to $20/share after MSFT pulls its offer. However, MSFT need not pull its offer for Yahoo! to shake Yahoo! up; it can submit a competing bid for Google knowing - even if it can afford to (it can’t) - it will never, ever be green lighted for both.
Google and Yahoo! cannot merge because their share in search would come to 60% + 30% = 90%.
Even if the antitrust bosses object to MSFT’s 10% market share being added to Google’s 60% share, there are ways around it for MSFT to sell MSN.com to Time Warner or News Corp. as a form of sacrificial lamb… It surely would be simpler than how Google could buy Yahoo!, something we covered here.
If for the next 3 months Yahoo! thinks that the specter of a MSFT/Google is even remotely possible, its investors would literally line up to torch the purple campus because Google + MSFT (with aQuantive) would annihilate Yahoo!’s lead in display in one quarter. Even if Yahoo! would make an overture to News Corp., Time Warner, or private equity, no one would be able to match MSFT’s outstanding $31/share offer.
I know, this is getting a bit crazy, but it could be done. It would be ballsy, but hey, with a name like Ballmer, why not at least consider it?
BOTTOM LINE:
I personally doubt this will happen, but for two years I said MSFT will make a run for Yahoo! and many of the thinkers that now say what’s taking so long thought I was crazy then.
What do you think?
Tags: Google, M&A, Microsoft, Yahoo!|
Posted By: Ashkan Karbasfrooshan | Mar 30th
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