Did Google make a mistake with DoubleClick?

Now that the Google-DoubleClick deal has been approved by European lawmakers, the online giant has finally taken control over one of the most important display advertising firms in the world. And while some are calling this a great day for Google, I'm not so quick to agree.

What, exactly, makes this such a great day for Google? Is it because it can solidify its position as the world's premier online ad firm? If so, I thought it already was: Google's total share of online advertising revenue before the DoubleClick deal was over 60 percent and no company was even close. If it wasn't that, was it because Google finally had a leg up in the display ad business where it has floundered for years? Possibly. But considering that DoubleClick only generated about $365 million in revenue last year, I just don't think this is a major step forward for the company.

I simply don't know how anyone can say the Google-DoubleClick deal was good for Sergey, Larry, and Eric. And if you look at the numbers and what Google is actually adding in this deal, it looks even worse.

If you ask me, Google made a mistake.

Sure, that may sound counterintuitive considering almost every Wall Street analyst and tech pundit is doing all they can to pump up this deal and make it look better than it is, but I think that's not only ridiculous, but extremely foolhardy.

Let's consult the numbers:

Google decided it would pay DoubleClick $3.1 billion for the rights to the DoubleClick name and all of its accounts. In essence, it was a full acquisition. On paper, $3.1 billion certainly doesn't look like a major amount of cash, especially when you're Google, but consider the fact that that figure is the most the company ever paid for another firm and the chances of it recouping it anytime soon are slim to none.

Why, you ask? As it stands, DoubleClick's latest revenue figures for 2007 were estimated at $365 million and it has been operating at an approximate profit margin of 10 percent to 20 percent over the past decade.

Realizing this, DoubleClick, which used to be a public company, but was then acquired by a private equity firm, was estimated to incur roughly $30 million to $60 million in profits each year.

Assuming outstanding corporate synergy and proper management of the details, there's no reason to suggest Google can't reduce operating expenses by about 50 percent to 75 percent (an average figure for many combined efforts) and thus increase its profit margin on the new division by the same factor. If it can do just that, the profit margin could increase to well over 60 percent, thus allowing Google to enjoy an annual profit of about $200 million.

Sounds better, right? If so, consider the fact that even at that point, the company wouldn't see a profitable return on its investment for about 15 years. Still not too great.

But amid all of this number crunching, you also need to consider the fact that Google should be able to increase DoubleClick's revenue by a good amount. From 2004 to 2007, DoubleClick's revenue grew by about $75 million, representing a 25 percent growth over that period. That said, Google has enjoyed extraordinary growth over the past few years and actually witnessed a 67 percent growth in ad revenue in 2006 and slightly less in 2007.

Assuming those figures, I think it would be fair to say that we can take an average of both companies' revenue growth and project that forward, creating a 50 percent (for ease of math) growth in revenue each year in DoubleClick's revenue.

Assuming that, the profitable return on investment could be reduced by about 7 years, making it possible for Google to recoup its money by 2016 or slightly later.

Taking all of those numbers together, who can possibly say Google made a good deal with DoubleClick? Sure, the possibilities of controlling online advertising are enormous, but the company most certainly made a mistake in its valuation.

And it's for that reason that Google will not only rue the day it acquired DoubleClick for that price, but will need to find a way to turn the tide and somehow increase its business by an astounding level to make shareholders happy.

The Google-DoubleClick deal was a mistake from a financial perspective. It's as simple as that.

[lmasanti]

quote:
"I just don't think this is a major step forward for the company.
I simply don't know how anyone can say the Google-DoubleClick deal was good for Sergey, Larry, and Eric. "

Maybe --with all due respect-- that's the reason why they are running a quite profitable company and you just writing a blog.
They can see "other things" (and also they can fail enormously without problem... in case you are right!).

[LEOPiC]

that's quite rude an unnecessary don't you think?

[aztec92154]

CNet Editors & bloggers are hammered on a daily basis. At first, I'm sure its kind of like a right of passage. Eventually I'm sure they grow a thick skin. Some CNet editors have even made shows (Molly Woods "Mail Bag") which feature upset, crazy, or critical e-mails and letters sent to [e-mail].

I think that what Don is trying to do in this blog, as in his other blogs, is to get a conversation started. He says, "I just don't think this is a major step forward for the company." So the question is, why would it (or would it not) be a major step foward for Google?

Before we do that, lets think about this comment by "Imasanti" for a second. He argues that Googles decisions shouldn't be questioned because Google is in a better position than we are to make decisions. Even if Google was wrong, again, and again, and again, they would be fine because they have a lot of money. WRONG! If Google messes up, WE the PUBLIC shareholders respond:

For example, on November 6, 2007 their stock price was $741.79 USD, a couple of days ago it was $413 USD... THAT's 94.2 BILLION that just evaporated. Take a look at their stock for the last three months. Should we be asking ourselves if Googles purchase of DoubleClick is good for Google? Hell yeah we should. Google stock is currently at 440 a share... so what gives, why the increase (blip?) in stock price?

I'm sure Google just wants the technology patents AND information that DoubleClick owns. Ryan Singal from Wired Magazine says the following: "The technology uses a DoubleClick cookie that reports back every time a user visits a site using the system, letting DoubleClick know that user 453689 likes to read motocross stories and GQ magazine and spends a lot of time playing online Flash games. Google can merge that database with its deep knowledge of users? search histories, along with its growing database of URLs visited by Google users who don?t realize that Google opts-in users to its ?Web History? program, which continually tracks their every step on the Internet." ( Check out the folloiwng website for more details http://voices.allthingsd.com/20080312/singel/ )

So will it be a good move? That remains to be seen, but stockholder confidence in Google continues ween as end-customers have begun to cut back on Google search advertising as we all head into a recession.

[SRobertRoberts]

I think it's more about strategy and tactics than it is about a direct return on investment. Had a competitor acquired DoubleClick, they would have had a platform to launch an attack on Google where it hurts. After all, Google's mission might be to make all human knowledge searchable, but it's the ads that pay the bills. Now, any would be competitor to Google in the ad space has no choice but to build from the ground up.