Google To Buy Sun? A Merger Rationale
A rumour that Google is about to acquire Sun Microsystems has been spreading across the Web for the last few days. Is it only a rumour, or could there be some substance here? One way to think about this is to put yourself in the shoes of the Google CEO, and ask - what would be the rationale for putting Sun together with Google?
By rationale, I mean, of course what would be the true rationale, not what the story spun to shareholders might be. Those are often not the same thing at all. So, as Google’s CEO, the first thing I’d say to myself is that my paper is currently overvalued. That means I better be using said paper to buy things. Little acquisitions like Upstartle (Writely) are in the noise; I need to be buying big companies.
The first hurdle, then, has been crossed for such an acquistion - I’d certainly in the market to acquire companies with multi-billion dollar price tags. What, then, will it cost me to buy Sun? Well, the current market price is approaching $17B - and lets say I have to pay a 20% premium to get the shareholders to agree. That means the price tag is around $20B. With Google being worth around $100B, I know I can probably swing this deal if I want to.
What would I be buying? A few things. I’d be buying a revenue stream of around $12B a year. That’s about double my current revenues. The combined company would have revenues of around $18B a year (triple current revenues), assuming no benefits of putting the company together. I’d also be taking on headcount. About 30,000 to add to the 6,000 I currently have. Many of these heads would be liabilities, but it could be a great way of massively expanding my software development team (if that’s what I needed to do). Now, the problem with Sun’s $12B revenue stream is that there’s no profits involved. However, what if I believed that by combining the two companies, I could trim ten thousand staff? That could translate into around $2B in extra profits per year, that is more than double my profits.
Another potential reason for acquiring Sun is that I believe it could be run more efficiently, and that even without top-line growth I can get big profits out of the company (compared to what my own company can do). I could then change the company’s sales model to look more like Dell’s, and grow the top-line too.
Another thing I’d be concerned about, as Google CEO, is Microsoft. That’s because Microsoft is trying to kill my company. However, Microsoft really has only a couple of assets that are worth anything: Windows, and Office. I can’t ignore Microsoft; better that I kill them before they kill me. Sun has three major assets that I could use here: Solaris (probably the world’s best OS); Java (possibly the world’s most important software platform); and OpenOffice/Star Office (the major competitor to MS Office). As Google CEO, I might believe a combined Google/Sun can do a better job of exploiting the potential of Solaris, Java and OpenOffice/Star Office than Sun has been able to alone.
So there you have it. A merger rationale for Google & Sun. By combining the two companies, I can: double my profits; triple my revenues; and do massive damage to my main competitor. I also increase my cash pile by about $2B to $10B, giving me more scope for cash acquisitions. Not a bad deal for issuing 20% more stock.
It would take a while to digest Sun, and make the combined company a success. But after that, the next big-ticket item on my shopping list would be… Apple.
Of course, all this presupposes that I, as Google CEO, didn’t believe the stuff I was spouting to shareholders about there being huge scope for increasing advertising revenues. If I really believed I could achieve massive growth in revenues and profits from this in both the near and medium terms, and that Microsoft won’t start competing seriously in on-line ads, then I wouldn’t bother acquiring Sun.
michael devenney wrote:
I believe the timeing for such an acquisition would be in the summer or fall of this year. I can see where there would be significant efficiencies to be had especially with the STK addition. Good sailing!
Posted 21 Apr 2006 at 1:11 pm ¶
Will Warner wrote:
As a Google CEO with a desk full of overvalued paper, you /could/ buy big companies; or you could just stick to your core business, make sure not to overextend yourself, and wait for the paper’s value to fall. Especially if the big companies for sale are like Sun. Sun makes hardware with good design, but they’re getting eaten by the badly designed Intel/AMD x86 architecture, which is back compatible and is an emerging universal standard, driven by economies of scale. Sun’s tried hard to become a services company, but until they kill their doomed hardware business, they’re a bad buy. Linux is already eating Solaris, in another case of economies of scale promoting standardization on an inferior product. (Although Linux is copyleft, which means that no one will ever have to pay for it, and that it runs on practically all architectures, so maybe it’s not inferior.) There are copyleft implementations of both Java and OpenOffice, so Sun will never be able to charge for them. The existence of Java and OO already gives Google leverage against Microsoft, but owning and funding the Java and OpenOffice teams themselves, and owning the copyrights on the reference implementations, wouldn’t give them any more. Buying Apple is a cute idea, but aside from being hip and having something or other to do with computers, the companies have nothing in common. In fact, the same applies to Sun. Google might just as well buy Dairy Queen.
Posted 23 Apr 2006 at 10:54 am ¶
simon wrote:
Sticking to your core business is a good idea, only if your core business is a solid one with a great future, and you don’t see greater opportunity elsewhere. M&A is an attractive route to achieving success in new business areas - for example, before Nokia became such a powerhouse in mobile communications, they used to make rubberised footwear. They realised that the future of telecomms looked brighter than the future of rubber boots.
Also, if you want to add value, it’s often better to buy companies that *appear* to be dead or at least very ill, because they will be much cheaper. Iif there’s no value to be added, you’re simply playing a zero-sum game. Of course, it goes without saying that you have to know how to add the value, and your acquisition must have the potential to be a successful business.
Posted 24 Apr 2006 at 9:37 am ¶