Simon’s Blog

By now, you’ve probably heard the news that Google is to pay $3.1B in cash to acquire one of the early pioneers of online advertising, DoubleClick (see the press release). I’ve seen a number of people writing that Google has overpaid here. The truth is, it’s quite possible that we may never know whether that’s right or not. However, I think it’s easy to see why Google would pay $3.1B for the company where others would not. Here’s why…

As I wrote recently, when blogging about the potential value of the photo sharing company, Photobucket, there are two questions that you need to have some kind of answer for when acquiring a company:

1. “What is the minimum price the acquirer has to pay to get the shareholders to sell?”

2. What is the maximum that the company is worth to the acquirer?”

Which of these two questions are more relevant, and what the actual answers to the questions are, depends on whether more than one company is interested in the acquisition The truth is, if Google had been the only company interested in buying DoubleClick, then they would not have had to pay $3.1B for the company. A healthy valuation for DoubleClick, in the absence of a bidding war, was probably around $2B (7X revenues). The DoubleClick shareholders would probably have taken that if it was the only offer on the table. Indeed, $2B is about the price that Microsoft was rumoured to have offered for the company before Google turned this into a bidding war.

So, the stage was set. Both Microsoft and Google wanted to buy DoubleClick. And clearly, Microsoft could have afforded to pay more than Google for the company. So, why didn’t they? Consider Question 2 above; and now put yourself in the positions of the CEOs of both Google and Microsoft. You have to present the rationale for the acquisition to your Board.

Microsoft Rationale

Microsoft needs to close the gap to Google in the on-line advertising space. While there are plans in place to do this by developing a compelling ad capability organically, and these plans are progressing on track, the management team believes that this acquisition would significantly shorten the timelines in executing on our plans.

Google Rationale

Microsoft is going to buy DoubleClick unless Google outbids them. If Microsoft gets its hands on DoubleClick, the Google management team believes this could seriously hurt Google by helping Microsoft to rapidly become a serious competitor to Google in the on-line advertising space. Google can not afford to let Microsoft get its hands on DoubleClick.

Of course, the Google management team would have put some more positive spin on the acquisition, both to their Board and to shareholders. – “DoubleClick does something amazing that Google can’t do, blah blah blah…” We can disregard such elements of the rationale here, however, because it’s little to do with the reason why DoubleClick was worth more to Google than to Microsoft.

The point is – in business, threat is often more powerful than promise. From Microsoft’s point of view, it’s actually not a total disaster that Google bought DoubleClick. Yes, Microsoft still has to do something about Google, but it’s not as if DoubleClick was some kind of “magic bullet”; had Microsoft bought DoubleClick, it might or might not have helped them “defeat” Google.

So, from Microsoft’s point of view, Microsoft buying DoubleClick would have been about promise. However, from Google’s point of view, Microsoft buying DoubleClick was about threat. And, because threat is so much more powerful than promise, this simply made DoubleClick worth more to Google than it was to Microsoft.

Update: John Batelle is reporting that Microsoft may actually have been prepared to outbid Google, but that at some point in the negotiations, Google and Double-Click and Google entered into a “no shop” agreement. So, presumably the Double-Click shareholders were happy with the offer from Google that was on the table, and weren’t interested in going back to Microsoft to say – “Do you want to beat that?”, provided that Google agreed to move ahead quickly with the deal.