Google’s Acquisition of YouTube Feb 20, 2007 Rachit Modi Rateb Nori

Topics we will be covering:  A brief history of Google  A brief history of YouTube  Synergies behind this Acquisition  The Acquisition  The Aftermath of the Acquisition

Google  Started by Larry Page and Sergie Brin – Ph.D. students from Stanford University  The search engine gathered a large following due to it’s simple, uncluttered and “clean” design – which turned out to be its competitive advantage  Google was incorporated on September 7, 1998 and went public March 30, 2006  Total initial investment raised for Google was $1.1 million – it now has a market cap of $130 billion

Google’s Dual Class Share Structure  Class A Stock: Similar to common stock but with less voting power  Class B Stock: More “ownership” than anything else Has far greater voting rights than Class A “By their ownership of 86,753,907 shares of Class B common stock, three of the company's executives (Eric E. Schmidt, Larry Page and Sergey Brin) controlled 66.2% of the total voting power of all the company's shares...even though they owned only 31.3% of the total shares outstanding” -ZDNet

Google  Leading search engine with a 54% market share, followed by Yahoo which has only 23%  Google monitors the highest internet traffic of any website – it gets the most clicks and searches in a day than any other website  Google.com is considered the most valuable online “real estate”.

Google’s Revenue  Google’s only source of revenue comes from advertising – about $7.14 billion in 2006!  The company began selling advertising associated with search keywords – which is based on the number of hits users make upon the ads.  Keywords were sold based on a combination of price, bid and clickthroughs, with bidding starting at $0.05 per click.

Google Video  Google announced Google Video on January 5,2006  Google planned on a pay-per-view service for its users to watch copyrighted videos through partnerships with TV companies such as CBS, NBA etc, but that was eventually scrapped and it allowed users to upload their own videos for others to see

YouTube  Founded by Chad Hurley, Steven Chen and Jawed Karim – all former cofounders of Paypal Inc.  Website was started in Nov 2005  It allowed users to upload their own videos for other to see – the same concept that Google Video was aiming for.

YouTube  By the summer of 2006, YouTube was one of the fastest growing websites, outpacing even behemoths like MySpace  As of a July 16, 2006 survey, 100 million clips were viewed daily with an additional 65,000 videos uploaded per 24 hours  It has an average of 20 million visitors clicking onto the website each month  The site has captured 47% of the online video market, compared to Google's 11%

Google’s Previous Acquisitions  All relatively small buyouts  Radio Advertising company, dMarc  Pyra Labs  created Blogger  Upstartle  created Google Documents and Spreadsheets  Jotspot  wiki technology  All of these acquisitions were relatively small, but with Google gaining huge revenues through its advertising, it got access to greater buying power - leading to the MySpace acquisition and now YouTube

Synergies behind this Acquisition:  Michael Cahill, managing director of Manhattan-based Chilton Investment Co. said ”…we're moving from dominated traffic to the MP3 player, and we are going ultimately to video, and that is going to consume massive amounts of bandwidth. With Google's (GOOG) YouTube acquisition... we've witnessed companies positioning themselves for video over Internet"

Synergies behind this Acquisition  Josh Bernoff, an analyst with Forrester Research. "I think the combination of the greater potential to make deals and also the greater technical ability to solve copyright problems puts (Google) in a much better position than YouTube is (in) by itself."

Synergies Behind the Acquisition:  With YouTube in the Top 5 most viewed websites, an acquisition like this would significantly boost Google’s advertising revenues - the “social networking” aspect of YouTube drives this acquisition  Sergey Brin, Google's co-founder and president of technology. "Video is a great medium for advertising,"  More than half of the online video watching market would be controlled by Google, similar to the internet search traffic that the company holds.

The Deal:  Google paid $1.65 billion to the YouTube owners 217,560 shares, and restricted stock units, options and a warrant exercisable for or convertible into an aggregate of 442,210 shares, of Google's Class A common stock The stock price was averaged over 30 days. The total amount issued excludes $15 million provided to YouTube between the announcement and the close. 12.5% of the transaction will be held in escrow for a year to cover "indemnification obligations."  YouTube was to remain a separate service under its own identity for the near future, though YouTube search results may include Google Video clips, and vice versa

The Aftermath

Hedge Fund Strategies  Eric Gettleman, a senior associate at Goldman Sachs Asset Management  You would take a long position on Google while taking a short position on the industry the acquiring company is in (online video sharing)  Similar to Risk Arbitrage for mergers

“Indemnification Obligations”  Some analysts/critics say $1.65bn was too much to pay for YouTube especially with the legal issues of copyrighted videos being posted on YouTube  “ Viacom, the parent company of MTV and Comedy Central, is demanding Google-owned YouTube to remove all of Viacom's videos. "100,000 video clips from Viacom-owned properties including MTV Networks and BET has been asked to be removed." Viacom reportedly claims "1.2 billion video streams" have been generated by YouTube without permission or compensation to the company.” - BusinessWeek

Catch-22  Do you think it’s alright for Google to share YouTube users’ information with media corporations such as Viacom? A) Yes B) No

Catch-22  If Google complies, it risks angering YouTube's users, many of whom want their identity protected and some of whom undoubtedly visit the site in hopes of viewing leaked or copyrighted material.  If it doesn't, it could frighten advertisers about identifying their brands with unknown user-generated content and concern regarding exposure to copyright suits.

So what do you think?  Did Google overvalue YouTube by paying 1.65 billion? A)Yes B)No

References  Wall Street Journal n_whats_news n_whats_news  BusinessWeek tm tm page_2.htm page_2.htm tm tm  ZDNet  Yahoo! Finance

Questions?