In this blog, we have looked at google a few times. In this article, we will take a look at the double click deal to see Google prospects.
First, let us look at Google's earning yield. The trailing earning yield is 2.1% and the forward earning yield for 2007 is 3%. The expected earning yield for 2008 is 3.95%. The 10 year bond is yielding 4.76% at the moment and is more attractive as an investment than Google stock.
Secondly, Google's competition is intensifying. Yahoo!'s Panama project seems to have started well and Microsoft's search/ad strategy isnt firing yet. However, Microsoft is not expected to give up easily - expect Microsoft to continue pouring money into this space till it captures some market share or the business itself is no longer relevant. We can take cues from the way Microsoft battled AOL in the last one decade. MSN internet access got to be profitable after losing money for years.
One thing that has changed about Microsoft is that it cant afford to spend money as freely as it did in the past as it has quite a few business divisions that are leaking money.
This brings us squarely to the double click deal. At 3.1 billion dollars a year and 1200 employees, is it a good deal for Google?
First, we have to look to see if the deal is accretive to Google's bottomline. Taking into account its 2007 earning yield, double click must generate about 90 million in profit to be comparable to Google's earnings and grow at around 30% pace in the coming year.
However, it is likely that DoubleClick's profits are far lower as Google paid for the entire deal in cash. Since cash is earning a higher yield in treasury bonds, it was a bit surprising that Google paid cash for the deal.
DoubleClick has about 1200 employees and if Google keeps them all, it will end up shelling out about 150-200 million dollars a year in employee salary/benefits alone. Moreover, this deal is unlikely to provide a moat to Google against Microsoft and Yahoo! as these companies already have a significance presence in the display ads market place.
It is difficult to understand how this deal is beneficial to Google at the price paid. It will be interesting to see how the stock will perform in the next couple of years.