Blog Post

Google Gains Pay For YouTube

Did the YouTube deal pay for itself? At least for one week it did. On Friday, October 6, 2006, Google shares closed at $420.50 a share. With roughly 304.36 million shares outstanding, that meant the company had a market capitalization of $127.983 billion.

TechCrunch had reported early Friday morning about the rumor, but the hype machine had yet to go into high gear. Of course, like me, many did not believe the likelihood of a deal, but the deal happened. On Friday, October 13, 2006, Google shares closed at $427.30 a share; Google stock closed at $427.30 a share, giving the company a market capitalization of $130.05 billion. The difference between two Fridays: $6.80 a share, or about $2.07 billion. Talking about a deal paying for itself!

Okay before you write outraged emails, if you started with the Monday (October 9, 2006) closing price, Google was in the hole for the week. But look at the hectic trading (trading volumes) on Friday and then on Monday – higher than average volume, it was in anticipation of the deal that stock moved up.

Still, does anyone else see the parallels between Google and Cisco Systems? During the go-go 1990s, Cisco used stock to buy companies; its share price went up, and it bought more. Google could do the same, and continue to gobble (or should we say gooble) up more and more Internet real estate.

Some random observations coming by the way of friends and other readers:

1. The $1.65 billion transaction price is pretty close to the total valuation of Real Networks ($1.86 billion at close of trading on Friday.) Stock market weighing in on the value proposition of Real! (Scott Rafer says so!)
2. Bucks of Woodside, California is so Bubble 1.0. Today deals are done at decidedly down market, Denny’s.
3. Selling their company to Google is the only way public school students can get a gig at elitist Google. Chad got his Bachelors of Arts degree from a little known school in Pennsylvania.
4. Niall Kennedy has put together a brief AJAXy history of YouTube.

So who is next? Our good pal, Mark Evans is doing some permutations and combinations and trying to figure out who is going to be bought! Our best guesses are three: MetaCafe, and Guba. MetaCafe is best fit for Yahoo.

It is very strong outside of the US, just like Yahoo; has elements of social sharing/filtering, which has become the underpinning of Yahoo strategy post Flickr acquisition, and more than anything, Metacafe can be adopted to become the sharing platform for large media owners, aka Terry Semel’s golfing buddies. and its quasi-raunchy content could be ideal fit for Viacom if the price is right. It marries well with the MTV/VH1 sensibility. We had heard some rumors, but they were just that – rumors. Guba could be a contender, since it has its own piracy protection technology (called Johnny.)

This originally appeared as part of GigaOM Weekly newsletter dated October 15, 2006.

23 Responses to “Google Gains Pay For YouTube”

  1. LordofMarketing

    I agree with MathGeek — Comscore’s page and visitor duration methodology needs a huge ASTERISK next to it since it grossly discounts any flash-based sites. Hundreds of sites on the web are getting the short end of the stick due to Comcore’s laziness/inability to track properly.

  2. MathGeek

    Comscore duration data does not apply to Flash based sites that have just one page (eg Myspace Video, Additcting Clips, Heavy) hence the low duration time.

    Page duration is capped at 2 mins per URL thus those sites are grossly discounted.

  3. Did the YouTube deal pay for itself?

    Interesting point, though potentially misleading. The deal simply didn’t pay for itself. Google is a publicly owned company and as such the shareholders paid for YouTube. Google was valued at $X. YouTube’s value to Google was priced at $Y. Google acquired YouTube and the new stock price became $X + $Y.

    That’s how mergers and acquisitions (should) work.

  4. Om,
    Thanks for your response. Maybe I’m reading that wrong, but doesn’t it sound like they were given “x” amount of shares based on the 30 days ending two days before the acquisition? In other words the average closing price of shares between Sept. 7th and Oct. 7th? Or is the “completion of the merger” sometime in the future?

  5. Garett,

    this is from the SEC filings…

    Under the terms of the Merger Agreement…the number of shares of [Google] Common Stock to be issued in the merger will be based on the thirty day average closing price ending two trading days prior to the completion of the merger. A portion of the consideration will be placed in escrow to satisfy certain indemnification obligations of YouTube and its stockholders described in the Merger Agreement.

  6. Vishal:

    Internet Analyst, Henry Blodget said,
    “Settle on basic deal terms and a provisional price, leak details so the market has a couple of days to chew on the idea, see how the stock reacts, neutralize the market’s biggest concern (lawsuits) by announcing a distribution pact with the main guy who might sue you, fix the price, rubber-stamp the press release, and go”

  7. Devin,

    actually Mark did not say Metacafe, I did. Their techology is pretty solid, and is in sync with Yahoo philosophy. As for adult content, well which video site is not packed with that kind of stuff. Even You Tube. You just need to find it .. remember Grouper. Just see their site and you will find adult type content and Sony did buy them for $65 million i think.

  8. Charlie,

    i think you and I are looking at it from two different sides of the telescope. as you suggest, if google stock keeps going up, the less they have to give to the you tubers and less out of pocket for google owners. you are just saying it more nicely that I can.

  9. Charlie Sierra

    Are you misinterpreting the stock market’s signal here?

    From the deal details, we know the total price is $1.65B in stock. The stock price and thus the number of shares to be issues will be set by a 30-day average ending two days before closing.

    Thus if the market is pushing GOOG up, that means the number of shares issued to goes down, thus minimizing the dilution.

    So the current GOOG owners are getting the benefit, at the expense of the youtubers. The market is correcting for the proper youtube price.

  10. Devin Smith

    Mark clearly does not understand the video market:

    • Metacafe has a lot of adult content. Check out their site without their family filter on. Yahoo can get a lot of traffic with porn as well.
    • Heavy has less than a one minute average visit per user. Not much of a platform.

    Never heard of Guba, but sure – i guess

  11. Jacob Varghese

    If FOX spins off their internet division as people have been speculating, then it could easily become the top takeover candidate. It would make sense for FOX to do so to take advantage of the much higher valuations in the tech space versus media.

  12. I must admit even i was not considering this deal to happen, but Google made it happen. It will be interesting to see how they will solve these content uploading issues with youtube.
    On the other side as I learnt during this buzz one thing makes sense that they don’t have to pay more as they paid 900 million USD for having search on myspace. If you put this in perspective that anything which is popular than myspace and have it in yr pocket, then it does sound a smart deal.
    Thats why i have to eat my words.