Google buyouts are BAD business
Google CEO Eric Schmidt and company are saying some wild and “crazy” things, literally.
I heard Schmidt tell Wall Street last month that it is still “unclear” how revenue will be generated from its $1.65 billion acquisition of YouTube while nevertheless expressing supreme confidence that the millions of YouTubers represent “potential” monetizable targets.Yesterday, however, Salman Ullah, Google's director of corporate development, told the Los Angeles Venture Association that “Google wants companies that can build revenue streams from their users, instead of buying firms with a lot of users that don't bring in much in sales,” according to Bloomberg reports.
We don't do traffic for traffic's sake,'' he said in emphasis, "It has to be highly monetizable.''
Really? Have YouTube Kings Chad & Steve been advised of the apparent Google about-face in acquisition philosophy?
Perhaps Ullah will say in his next talk that Google screens for billion dollar copyright infringement risk before any investment is made!
What is Google’s real buy-out criteria? Ullah put forth typically Googley speak:
Google looks for ideas that are 'really crazy'' when sizing up potential purchases: The crazy ones mean they ignore the usual restraints of investment levels required.
In other words, Google can get them on the cheap, the favorite Google price!
Is a Google acquisition really the end game Web 2.0 start-ups should aspire to? Is a Google buy-out really good business for entrepreneurs?
Google’s two highest profile and most expensive acquisitions are not top models for emulation: dMarc Broadcasting and YouTube.
In “Google: Will YouTube Kings Chad & Steve bail?” I asked if the two video Kings are giddily laughing now:
When Google bought out Chad and Steve with a hearty serving of GOOG, Google proudly underscored that “We’re pleased that the YouTube shareholders want to become shareholders of Google and participate with the rest of us.”
How pleased are Chad & Steve now? GOOG "participation" is not a pretty picture in 2007.
The dMarc co-founders have indeed bailed.
Why? Because they did not have confidence in a Google-dMarc ability to make good on the $1.136 billion in contingent cash payments that was structured into the buy-out in lieu of a larger up-front cash consideration, resulting in a buyout more financially attractive to Google shareholders, rather than to the dMarc shareholders:
Google will be obligated to make additional contingent cash payments from time to time if certain product integration, net revenue and advertising inventory targets are met over the next three years. The maximum amount of potential contingent payments is $1.136 billion over the next three years. Since these contingent payments are based on the achievement of performance targets, actual payments may be substantially lower.
Google recently warned in its latest Annual Report filing that its acquisitions could provoke “harmful consequences” to Google acknowledging, “We do not have a great deal of experience acquiring companies.”
The YouTube buy-out was also structured to Google’s great advantage, as I dissected upon the acquisition announcement in Google buys YouTube on the ‘cheap’: $1.65 billion in Google stock:
What will be the impact of the downward trending GOOG, however, on the YouTube King shareholders?Google’s mastery at financially savvy, shrewd transactions continues apace: Google is acquiring YouTube for $1.65 billion in a stock-for-stock transaction.
Google proudly noted during the joint YouTube-Google conference call that the non-cash deal “made it cheaper for us.” YouTube shareholders also benefit from a “tax-free transaction,” Google said.
Why $1.65 billion? Is that the worth of YouTube? Not necessarily: Google used a “synergistic model” to justify handing over $1.65 worth of Google stock, not a stand-alone valuation. What will the impact of the stock-for-stock deal be on Google’s financial position? Not much. Google says the transaction will be only “slightly dilutive.”
Google buy-outs are done in typically Googley fashion, the Google-centric way, be they big, flashy ones, or small under the radar ones.
Is Google really a friend of entrepreneurs when it “thinks small” in scooping up fledging start-ups at barely more than asset value in order to neutralize potential competition, bag engineering talent and fatten up its library of code?
The Dodgeball buyout is a case study in the not quite fairy tale happy ending for Web 2.0 hackers hoping to gain fame AND fortune via a quick Google flip, as I recount in Google’s Dodgeball, where is it now?:
Alex Rainert and Dennis Crowley transferred the rights to their start-up service to Google, but it is unlikely the two former grad students are living “like Kings.” As part of Dodgeball’s absorption by Google, the Dodgeball “team” became part of Google’s engineering team.
Dodgeball assets also became part of Google, to do what it like with, or not; Google has apparently decided to dodge Dodgeball!
Dodgeball.com presents as if it is in a time warp, a whopping two years after the buy-out of NYU student developers Dennis Crowley and Alex Rainert.
World famous Google even has to note at the Dodgeball sign-up page: “Did you know that Dodgeball is a part of Google these days?”
The better question is: Does Google care that Dodgeball is part of Google these days?
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