The Google Private Equity Fund – Why the Google Acquisition of DoubleClick Will Probably “Work,” But is a Mismatch

By Sean Fenlon on April 15, 2007

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Headlines read…

http://news.google.com/news?hl=en&ned=us&q=doubleclick+google&ie=UTF-8&scoring=d

• Google to buy DoubleClick for $3.1 billion in cash
• Google Pays Exorbitant $3.1 Billion For a $100 – $150 Million DoubleClick
• Google Buys DoubleClick, Leaves Microsoft Way Behind
• Google-DoubleClick: Get ready for the fallout
• Google’s Biggest Acquisition: DoubleClick, for $3.1 Billion — Almost DOUBLE the YouTube deal
• Ad firm DoubleClick fetches $3.1 billion

Now let’s do the math beyond the headlines…

By my math, the price paid by Google for DoubleClick (after DoubleClick’s cash-balance add-back), is at least 10X the DoubleClick top-line 2006 revenue. In case you are wondering, that is a BIG multiple for any company with a profitable history or otherwise historically measured on earnings. While this information is interesting water-cooler talk, the more interesting angles points towards Google’s new philosophical direction(s). With the $3.1 Billion acquisition of DoubleClick, Google philosophically entered the world of Private Equity more so than the world of display advertising (I’ll address the latter in a moment).

Private Equity firms execute deals because the “math” supports the decision. In Private Equity buyouts, the deal elements such as management team mojo, strategic fit/value, and core values of the acquired company take a back seat to back to the question of “if we pay X, and very few trends change fundamentally, what is the probability of a respectable Y ROI.” In other words, it’s more science than art. Any partner (read: scientist) at a Private Equity firm that can consistently drive and deliver deals that return 25% IRR consistently will achieve rock star status. Very few other measures beyond ultimate ROI vis-à-vis IRR will play a roll. In this current acquisition scenario, if Google only provided “helpful” value (arms-length introductions, advice, etc.) to DoubleClick, they will easily realize a 25% IRR. Thus, it is Private-Equity-esque math that makes the Google/DoubleClick deal swallow-able.

Now, there is the other philosophical direction to consider – display advertising. DoubleClick is in the same space as Google – Internet Advertising and Online Marketing – but they are in completely different sandboxes. Relatively speaking, display advertising inventory is significantly less valuable than search or even contextual advertising inventory.

Many will argue that display advertising is not such a stretch for Google, as companies have run display advertising campaigns through their Adwords accounts (across the display-enabled Adsense publisher network) for years. However displays are files. The interpretation of the files are not nearly as literal and not nearly as relevant as true text. Text is the DNA of Google:

• Google cut its teeth as no-revenue text-based search engine. Search terms are text.
• Google’s first and still primary profit center came from trigger advertisements that were highly-correlated to the search term (as determined by the human-based market).
• Google extended this core offering into “contextual” search, where the static content of a web page was essentially inferred down to a few keywords, and advertisements were displayed based on the inference.
• Ask any search marketer, however, and you’ll hear how Google’s contextual advertising causes the volume to skyrocket and the quality/conversions to plummet relative to the user initiated search.
• The most important feature regarding conTEXTual advertising, however, is the root term “text.”
• Text ads based on text terms remains somewhat relevant, even if they’re only being inferred from a static page, as opposed to being implied by a live user.

However, display advertising (despite the sophistication of behavioral targeting, optimization, etc.) is fundamentally different than both contextual advertising and especially user-initiated search. Google has been instantly catapulted into a world where quantity is king and quality is only a mild indicator, even though the Google roots are quite the opposite.

Having said all of that, here’s where we’re all wrong with respect to the Google deal to buy DoubleClick…

Google has the luxury of placing five and ten year bets. If Google is bullish on the DoubleClick acquisition to reap rewards 5-10 years out, none of my words (nor any other non-insider voice) will be of much value in assessing the deal. However, if the CEO of DoubleClick shorts his stock and buys an NBA team, I believe we can officially declare Bubble 2.0 is upon us. :-)

SPF

p.s. in the past, I have been asked if my choice of the name DoublePositive was in any way affected by DoubleClick. The answer is no. In the spirit of full-disclosure, the name DoublePositive was more influenced by the term “Double Opt-in” than anything else. Also, look for follow-ups on “What will Google do with Performics, the Affiliate Network acquired by DoubleClick years ago, and still operating under its own brand” and “How Much of the Google/DoubleClick Deal Have to do with the Microsoft angle”

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