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MicroHoo: Still a Mirage

Written By Drupad Sil | May 5, 2008 | Share This |

MicroHoo

Unless you’ve been in a cave the last three weeks, you’ll have heard of Microsoft’s unsolicited bid for Yahoo! and followed the complex tango performed by the company’s respective top executives, Steve Ballmer and Jerry Yang. The soap opera-like unfolding of this financial ordeal played out daily in newspaper headlines, with assurances and deadlines from both sides ultimately being worth less than the ink it took to print them as Microsoft pulled its offer, abandoning talks three months into the process.

Well, in the end the magic numbers were 19, 33, 37, and 24. $19 is what Yahoo was trading at on January 31, immediately before the Microsoft acquisition story broke. Overnight, Yahoo daily share volume increase tenfold and share price skyrocketed about 53%, where it remained during the three months of talks. Microsoft’s final offer for Yahoo was $33 a share (a 72% premium over January’s pre-acquisition talks price), with Yang holding out for a sky-high $37 a share. Not unexpectedly, as today is the first full trading day since the end of negotiations, Yahoo’s share price has plummeted about 15% to around $24, the biggest drop for Yahoo in two years.

The questions being asked are how will Microsoft expand its online market share without Yahoo, and what Yahoo’s next move will be. There is some speculation that Microsoft is eying AOL, or waiting to get back at the table with Yahoo in a quarter or two (about the time it’d take to think of a better name for this deal than ‘MicroHoo’). Since Yahoo’s share price is hovering above the original $19 a share, I’d wager the latter is getting priced in.

Another issue that is getting priced in is the potential of a Yahoo-Google deal. The two had a mutually-described successful implementation of Google’s search advertising on Yahoo’s properties, which could point to future joint projects ahead. However, I think Google may have pushed a little harder to get in with Yahoo because of the pressure from the Microsoft offer. Now that there’s no competitor at the table, Google can take its time in whatever it chooses to implement, leaving Yahoo the big loser in all of this.

Indeed, it’s difficult to get away from being negative on Yahoo after everything is said and done. Despite Yang’s assurances that all is well, there is little that points to investing in Yahoo as a defensible long-term strategy that will produce returns. No doubt this aggravates shareholders and execs, who could have escaped with a sweet profit from the Microsoft deal. Any combination of the Big Three would be subject to government review and antitrust regulations, but this first move represents the opening gambit of an acquisition chess game as Microsoft looks to combat Google on its home turf, search.

Facebook: Worth Two Times Mozilla?

Written By Drupad Sil | April 29, 2008 | Share This |

Market Crash

Henry Blodget at Silicon Alley Insider unveiled the SAI 25 Live, an auto-updating list of the world’s “Most Valuable Digital Startups” as assessed by Blodget and his associates. More from SAI itself:

“Like public companies, the value of private change in real-time, but there’s no convenient way to track these changes… until now. We’ve created a real-time tool, the SAI 25 Live, that indexes the value of the SAI 25 companies to the NASDAQ. The SAI 25 Live updates the values in real-time (with a 20-minute delay). So if you’re jealous of all your friends at public companies who can recalculate their net worth all day, just check out the SAI 25 Live. This will tell you how much your stock options are worth right now.”

Now, there are a multitude of techniques available to perform valuations of public companies practiced by investors, ranging from the textbook (dividend discount model, earnings multiplier model) to the obscure (ask James Simons at Renaissance). However, they all have one thing in common: a heavy reliance on the availability of financial data, like revenue and profit numbers, free cash flow and balance sheet results. Unfortunately, these numbers are rarely publicly available for private institutions like those on the SAI 25 Live, leading one to wonder how accurate these valuations are. From the SAI 25 Live valuation page:

“Valuing companies is a subjective exercise, one that is highly dependent on information. In theory, companies are worth the present value of future cash flows, but since no one knows exactly what future cash flows will be (or the perfect rate at which to discount them), theory and a dollar will get you a cup of coffee. An additional challenge of valuing private companies, as opposed to public ones, is that detailed financial information is often unavailable or outdated. And many private companies are often early in their growth cycles and therefore haven’t reached mature profit margins.

Ultimately, of course, private companies are worth what any stock or asset is worth – what someone will pay for them.”

Of course, here Blodget is correct twice. Private companies are certainly worth what people will pay for them. Also, theory and a dollar will get you a cup of coffee, which is exactly the value of this analysis. The SAI 25 Live takes into account implied valuations in private financings (a terrible absolute indicator, but of some value directionally given an existing valuation), financial performance (nonexistent for most of this list), market share and market size (doable), and growth rate (dependent on revenue numbers, which are rarely reported and so must be guessed) making this list a poor indicator of anything other than relative valuations (Facebook is worth more than Ning, who knew?), and even there it can only be used sparingly (company X being worth Y times that of company Z on this list is probably meaningless). In the words of Erick Schonfeld at TechCrunch:

“Putting a value on private companies is hard enough for insiders and venture capitalists who have full access to the company’s financial statements. When outsiders try to do it, even well-informed ones, it is nothing more than a guessing game. But it is nontheless perhaps one of Silicon Valley’s favorite parlor activities.

Some of these valuations have more merit than others. Some have none whatsoever. For instance, SAI gets at its $125 million valuation for Digg by ‘splitting the difference’ between a $200 million buyout rumor we reported and the $60-to-$8- million that Kara Swisher came up with. Splitting the difference between the two rumors is not exactly the height of financial analysis.”

Agreed. Some have even gone so far as to call it an attention-grabbing activity, like FakeSteve:

“To make it fresh and dynamic, they somehow yoked these made-up numbers to the NASDAQ so their made-up numbers change into new made-up numbers all day long. That way all these [employees] working for worthless companies will click on that list all day long…generating loads of stupid traffic for Alley Insider. And trust me, that’s the real point of this list. It’s a cheap ploy for ginning up traffic.”

Or for pulling financial information straight from the horse’s mouth. There are so many requests for data that could correct these valuations that it almost seems like a device for getting these companies to divulge their actual numbers straight to SAI. Regardless, it is difficult to accept a 25x revenue valuation for Facebook common stock, given that Google trades at between 10.5x and 15x revenue, which in itself is unusual. Also, Wikipedia, valued at $7 billion, is a nonprofit, meaning the assessment measures Wikipedia’s asset value if it were to change into a for-profit organization. This change would certainly affect its users, which in turn would affect the site’s operation, affecting the valuation.

Perhaps the best thing to take away from this is that it is indeed just an entertaining parlor game to perform these valuations. Serious investors should already be familiar with this.

Skype Announces Unlimited Long-Distance Calls to 34 Countries

Written By Drupad Sil | April 21, 2008 | Share This |

Skype

A big announcement today by VoIP services provider Skype. The eBay-owned company unveiled unlimited calling to 34 countries including Australia, China, Germany, Japan, and the UK, essentially covering a third of the world’s population. Skype’s version of “unlimited” is 5 hours a day every month, which for most people is effectively unlimited.

Skype is one of eBay’s biggest divisions and caused the online auction company to take a $1.4 billion writedown last year when it purchased Skype for $4.3 billion. The issue was an inability to monetize largely free Internet calling. However, with 309 million users, there’s plenty to be optimistic about. Mark Evans has more to say:

“Consider Skype’s first-quarter results: another 33 million users came on board…year-over-year revenue climbed 61% to $126 million and Skype-to-Skype minutes rose 30% to 14.2 billion. So, what you’ve got is a high-growth business that will likely have sales of $500-million in 2008.”

With those growth prospects and owner eBay looking to recoup some of last year’s losses, there’s growing speculation that a Skype spin-off or telecom acquisition could be in the works. From iLocus:

“In the meantime, which direction should Skype pursue and what should be the eBay criteria in deciding the future of this business unit? I think the criterion should be future growth of Skype itself…So I think the first choice should be to spin off Skype as an independent company rather than selling the asset at a substantial loss to some other company. If, however, selling Skype to another company is the only choice, I think a telco acquisition could make sense for Skype…Through Skype acquisition, not only does a telco get the most popular telephony interface on the Internet, it also inherits a large pool of developer partners that a telco could only dream of.”

We’ll keep a close eye on Skype and its tremendous growth. This could be the year that it all pays off.

Google to Sell Performics, Lay Off 300 at DoubleClick

Written By Sepideh Saremi | April 2, 2008 | Share This |

google performics doubleclick layoffs

Google’s DoubleClick growing pains are making themselves clear today, as the company announced it is selling part of  Performics, the search marketing arm of its DoubleClick acquisition, Search Engine Land reports. From the Google Blog:

Recently we completed this process for the DoubleClick Performics businesses, and have decided to split them into two separately-run business units: Affiliate Marketing and Search Marketing.

It’s clear to us that we do not want to be in the search engine marketing business. Maintaining objectivity in both search and advertising is paramount to Google’s mission and core to the trust we ask from our users. For this reason, we plan to sell the Performics search marketing business to a third party. We believe this will allow us to maintain objectivity and the search marketing business to continue to grow and innovate and serve its customers. While we have not yet identified a buyer, we’ve received preliminary interest from a number of our current partners. Search Marketing will continue to run as a separate entity until the division is sold.

And in its first layoffs ever, Google will reportedly bid goodbye to a quarter of its American employees at newly acquired DoubleClick, though the company’s mum about the exact number of axed jobs right now. The NYT reports:

The cuts represent about a quarter of DoubleClick’s American work force of about 1,200. The company has about 1,500 employees worldwide, and the chief executive of Google, Eric E. Schmidt, has suggested that job cuts would also affect DoubleClick’s overseas operations at a later date.

Google declined to confirm the number of layoffs.

In a statement, the company said: “Since our acquisition of DoubleClick closed on March 11, we have been working to match and align DoubleClick employees in the U.S. with our organizational plan for the business. As with many mergers, this review has resulted in a reduction in headcount at the acquired company.”

Ask.com Parent IAC Will Break Up

Written By Sepideh Saremi | March 31, 2008 | Share This |

ask.com IAC barry diller

Barry Diller and IAC officially won their day in court on Friday: The parent of Ask.com will break up its conglomerate into five branches. According to TechCrunch, the new companies will be the Home Shopping Network, Ticketmaster, Lending Tree, Interval International, and the new IAC, which will be an umbrella for various web properties, including Ask.com. The move is expected to revitalize IAC’s online businesses, but TechCrunch notes:

The problem, as came out during the trial, is that those underlying Web businesses are not growing as fast as Diller had hoped either. Ask.com failed to reach its goal of doubling its market share of search, and Ticketmaster missed out on the growth of the secondary ticket market and recently had to buy TicketsNow for $265 million to compete with StubHub (owned by eBay).

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EBay To Cut Jobs and Restructure

Written By Sepideh Saremi | March 20, 2008 | Share This |

ebay

Reuters reports today that eBay will be cutting some staff in what a company spokesperson calls a “globalization and centralization effort.” The number to be cut is less than 1% of eBay’s workforce, the spokesperson said, which could be as many as 150 people, as eBay has around 15,500 employees, according to Portfolio.com. With recent news that eBay dumped its partner ValueClick in favor of handling its affiliate network in-house, it looks like eBay is focused on making a lot of improvements in advance of its Q1 earnings call in April.

Despite a seller’s strike over increases in fee listings, Wired reports that eBay’s doing very well, though Don Reisinger at CNET’s News Blog argues that’s because eBay’s got no competition. Reisinger writes that eBay’s decisions over the last few years have made the company forget its core service as an auction site:

eBay is an auction site much like Christies is an auction house. Do you see “Buy it Now” features promoted at the Christies auction? Can people attending the auction make VoIP calls during it? Do they really want buying advice?

eBay has lost its way and the only reason it’s able to enjoy these profits is because there’s no company out there that’s willing to compete on such a grand scale. But why not? eBay is obviously worried about the future and auctions are still a viable way to buy products. If a company came along that finally revolutionized online auctions, the entire landscape of the business could be changed forever and eBay would be long forgotten.

EBay’s CEO Meg Whitman is leaving at the end of this month, and with eBay’s new focus reportedly being on platforms and distributing its content, I think that might be the revolutionary push the company needs to restore its past glory.

Yahoo: Financial Plan as Negotiation Tactic

Written By Sepideh Saremi | March 18, 2008 | Share This |

yahoo.jpg

Yahoo yesterday filed its three-year financial plan from December 2007, detailing expectations of doubled cash flow by 2010 and reiterating that it believes Microsoft’s takeover bid offer of $31/share undervalues Yahoo. But it may be too little, too late, as the economy has taken a bit of a nosedive since December ($2 shares of Bear Stearns, anyone?), making those Yahoo’s financial forecast optimistic. Mashable lays it out nicely:

Unfortunately, they’re forgetting that in December 2007 Dow Jones was some 1500 points higher than it is today, and a lot of crappy things have happened for the US economy in the meantime. Thus, what they predicted last year probably doesn’t hold water anymore; and let’s not forget that they weren’t doing all that well in 2007, either. There’s a reason why Microsoft went with an unsolicited bid - they knew where Yahoo was at and they knew where it was heading.

Yahoo has been trying to fight off Microsoft’s $44.6 billion takeover bid, made at the beginning of February, by engaging in talks with AOL, News Corp, and private firms in efforts to avoid a union with the software giant. CNET notes that part of Yahoo’s presentation to investors detailed its investments in Asia, which are doing very well and Yahoo complains weren’t adequately taken into account when valuing the company. Despite the presentation (or maybe because of its slightly desperate timing), it’s looking more likely that Microsoft will end up owning Yahoo - something that analysts polled by Reuters are still convinced will happen.

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AOL Buys Social Network Bebo for $850 Million

Written By Sepideh Saremi | March 13, 2008 | Share This |

aol bebo

AOL today announced it is acquiring UK-based Bebo for $850 million. The social network is expected to complement one of AOL’s most popular services, the instant messaging system AIM. From the Bits blog:

As AOL has search for a growth strategy over the last decade, one of the biggest puzzles has been what to do about the AIM system, which allows anyone on any computer to send instant messages, whether they were paying AOL customers or not. Even as AOL’s access service declined, AIM remained the preeminent IM system in the United States, fending off competition from Microsoft, Yahoo, and later Google.

AOL has tried to out social network from AIM, but it was never successful. And Google now integrates AIM in its own chat system, taking advantage of AOL’s network of users. By buying Bebo, AOL now has its own social network which, when married with its robust advertising network (a result of a relatively recent buying spree over the past several months), solidly puts the company in the running with social network behemoths MySpace and Facebook, who are also still figuring out how best to monetize their vast user bases. Bebo has 40 million users worldwide and AOL says it is the third most popular social network in the U.S.

Search Engine Land notes that Yahoo had previously wanted to buy the social network. The company is a search and advertising partner to Bebo and has also been in talks with AOL about the possibility of merger, to avoid an acquisition by Microsoft.

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Will Google Dump Performics?

Written By Sepideh Saremi | March 12, 2008 | Share This |

google doubleclick performics

The Google-DoubleClick merger got the green-light from the EU this week, but Danny Sullivan reminds us - and Google - that as part of the deal, the search giant now also owns Performics, a search engine marketing agency. This presents a conflict of interest, as well as ticking off SEOs. Writes Sullivan:

Even if Performics is kept completely separate from the Google search team, there’s the impression that Performics might have some special “in” with Google’s non-paid search results. After all, Google owns it! It’s also not hard to imagine that despite all the best intentions, some new sales rep might pitch that Performics has some type of in. That [sic] a bad thing. FYI, Performics already touts its relationship on the paid side, as do many other search marketing firms.

TechCrunch’s Duncan Riley agrees that Google should sell off Performics. Both Sullivan and Riley are right - though Google is huge and could conceivably keep Performics away from the rest of its operations, it can’t avoid the appearance of impropriety. And that doesn’t jibe well with the whole “Don’t Be Evil” company motto.

EU Approves Google-DoubleClick Deal

Written By Sepideh Saremi | March 11, 2008 | Share This |

EU Google DoubleClick deal

The European Union today approved Google’s $3.1 billion acquisition of display ad tracker DoubleClick. From the EU:

The European Commission has cleared under the EU Merger Regulation the proposed acquisition of the online advertising technology company DoubleClick by Google, both of the US. The Commission’s in-depth investigation, opened in November 2007 (see IP/07/1688), concluded that the transaction would be unlikely to have harmful effects on consumers, either in ad serving or in intermediation in online advertising markets. The Commission has therefore concluded that the transaction would not significantly impede effective competition within the European Economic Area (EEA) or a significant part of it.

The European Commission determined that Google and DoubleClick aren’t rivals and wouldn’t have a negative impact on competition. Of course, Yahoo and Microsoft, ironically two companies that may now merge and would have to face the same commission if they do, vehemently opposed the Google-DoubleClick deal because it gives Google the leverage it needs to take over the display ad world online, as it has with search ads. Google has made no secret of its ambitions in display ad space, either: Dow Jones reports the company wants to secure a “very significant” place in online display advertising by next year, at latest.

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