Monday, October 09, 2006

Color on rumor: Google (NASDAQ:GOOG)

Couple of firms are commenting on news that Google (NASDAQ:GOOG) is in active talks to acquire YouTube for approx. $1.6bn.

- Merrill Lynch notes YouTube has 46% of user visits to online video sites (100mn videos a day), versus 11% for Google (per Hitwise). Google/YouTube would have a strong user position in the rapidly growing video advertising market, expected to reach $640mn in 2007 and grow to $1.5bn by 2009 (per eMarketer). Ownership of video traffic would help Google capture a bigger portion of advertising revenues from video content distribution deals (Viacom deal signed early Aug.), although content owners would still likely keep the majority.

Firm would view acquisition as positive on 3 of the 4 components of their acquisition evaluation criteria, including: 1) fit with core business (Google's ad network could help fill video ad space), 2) management experience in new business (Google has a large and growing video site) and 3) growth opportunity (video is the second biggest Internet advertising growth driver behind local, in ML's view).

Assuming a $1.6bn acquisition value, a 20% share of the 2009 video ad market for YouTube, 30% operating margins for video and a 30% tax rate, the firm estimates that Google would
be paying 25x potential 2009 net income.

Much of the content on YouTube is free, and many video clips are copyrighted material from traditional media companies. Google could be responsible for filtering out copyrighted material or negotiating revenue sharing partnerships with the owners before aggressively monetizing YouTube. On a positive note, the large YouTube user base could help Google sign new content partnerships.

Maintains Buy on GOOG

- Citigroup thinks the most releveant dpoints re: YouTube: 1) it currently ranks as the 17th most visited Website in the world; 2) its videos are viewed 100mm+ times daily; 3) its biz model is entirely based on advertising, and new advertisers include Cingular, Nestle & American Express; & 4) it is reportedly close to break-even.

Were the deal to take place, the negatives for GOOG: 1) It would be a radical departure from its M&A strategy, which has been almost exclusively based on tuck-in technology deals; 2) Per firm's 08/18 Internet M&A report, the $1.6B would also be almost equal to GOOG's entire M&A spend to date; & 3) It would acknowledge that Google Video has failed to gain sufficient traction.

The clear positive for GOOG -- synergies between the world's 3rd largest user generated content site and arguably one of the world's largest and most scalable advertising/computer networks could be enormous.

Notablecalls: I guess it would be positive for GOOG if they bought YouTube. After all, $1.6 bln is just peanuts for the co. And the service YouTube offers is phat. I know I have lost myself there for hours at a time. The only problem I see with this merger is that in order for GOOG to monetize the thing, they need to apply some pretty harsh censorship. And that could kill the whole concept.

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