FT : Google Gobbles Doubleclick

Saturday, April 14, 2007

Google on Friday pulled off the biggest in a lengthening line of acquisitions as it won a bidding war with rivals Microsoft and Yahoo over DoubleClick, one of the early pioneers of online advertising.  One of the first companies to develop an automated network for delivering adverts to targeted groups of users online, New York-based DoubleClick was a star of the dotcom boom, but crashed when internet advertising went into reverse in 2001.  It was eventually taken private in a $1.1bn leveraged buy-out two years ago by a private equity consortium led by Hellman & Friedman.  Recent reports suggested that the private equity firms were carrying out an informal auction of the company starting at about $2bn, and one person close to the deal described the heated bidding of recent days as “extraordinary”.

THE DEAL

  • The $3.1bn cash purchase, almost double the amount it paid in its all-stock acquisition of YouTube, will turn the search engine company overnight into one of the biggest sellers of online display advertising, a field in which it has until now been only a small player.
  • However, the deal represents a high price given DoubleClick’s revenues, which one person familiar with the deal put at $300m-$400m, and reflects a sharp intensification of the competition between some of the internet’s biggest companies as they jostle for leadership in the fast-growing online advertising markets.  Eric Schmidt, chief executive of Google, defended the high price based on the potential to cross-sell DoubleClick’s services to Google’s existing search advertising customers.  Speaking in an interview with the Financial Times, he said: “There’s no question in our mind that we’ll get this money back, and more.”

THE RATIONALE

  • Display advertising, which is often broken up by the medium, has not been as vibrant as search in recent years.  In an October report, eMarketer put the display advertising number at $3.34 billion for 2006 and expected it to grow to $4.5 billion by 2010.  Meanwhile, paid search advertising accounted for $6.76 billion of online ad spending in 2006 and was projected to grow to $10.3 billion by 2010.  Bill Gossman (CEO of targeted advertising network Revenue Science) believes that display will grow faster than expected because of increased targeting capability.  Display advertisers have typically sought to place their ads on pages where the content is related and thus likely to attract interested consumers.  For example, an SUV marketer would stick a banner on an autos site.  Ad networks and search engines such as Google can now target banner ads to customers who have demonstrated an interest in content related to the ad, even if the page has nothing to do with the advertiser’s product, says Gossman.  As a result, brand advertisers are becoming increasingly interested in display ads, says Gossman.  In fact, Gossman and others believe that display ads are poised to begin taking advertising dollars away from the television advertising market.  For Google, the purchase opens up a big new advertising market at a time when its core search advertising business is starting to slow, though at the cost of eating into a cash hoard that stood at $11bn at the end of last year.
  • The other big benefit of buying DoubleClick for Google is keeping it out of Microsoft’s hands.  At the moment, Microsoft poses little threat to Google’s search advertising business.  Its share of Internet searches has been on the decline and dropped to less than 10% in March, according to an Apr. 11 Hitwise report.  DoubleClick could have changed that for Microsoft.  DoubleClick serves ads on both Time Warner’s AOL and News Corp.’s MySpace, two of the Web’s most popular properties.  Google has the rights to provide search ads on both those sites—it bid aggressively to do so, agreeing to pay nearly $2 billion to both companies.  But if Microsoft had acquired DoubleClick, it could have had a competitive position at the two companies, jeopardizing Google’s expensive search agreements.  It could also have given Microsoft a much greater search share.
  • The company has indicated that it has also earmarked a large amount of that cash for content deals that it hopes to reach with traditional media companies to bring more video to YouTube and its other sites.  Many of the advertisers who use DoubleClick’s network to place display, or “branded”, advertising on a variety of websites also use Google’s network to distribute text-based search adverts, Mr Schmidt said.   “The integration [of search and display advertising] is what people have been asking us for for a very long time,” he added, making it possible to sell the two side-by-side. 
  • By combining the analytical and other tools used by the two networks, Google would also make it easier for advertisers to manage and track their online campaigns, and assess the financial returns from both classes of advertising alongside each other, company executives said.
  • For DoubleClick’s private equity owners, meanwhile, the sale will bring a sizeable profit from a company that was still widely thought of two years ago as a victim of the dotcom bust.  According to one person familiar with the deal, the sale price amounted to an eight-fold return on the equity portion of the original investment in DoubleClick, after also taking account of an earlier sale of part of the business.

References :
http://www.ft.com/cms/s/d2c64538-ea12-11db-91c7-000b5df10621.html
http://www.businessweek.com/technology/content/apr2007/
tc20070414_675511.htm

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