Should Microsoft buy DoubleClick? Better double think that one

There is a lot of buzz in the financial press about Microsoft making a bid to acquire DoubleClick. Larry Dignan at ZDNet thinks Microsoft should do it. The Wall Street Journal says;

The company is majority-owned by San Francisco private-equity firm Hellman & Friedman, which since purchasing DoubleClick in 2005 for approximately $1.1 billion, has sold off a number of divisions and reshaped the business. Hellman is seeking at least $2 billion for DoubleClick, said one person briefed on the situation, and it remains an open question whether the firm will choose to complete a deal.

DoubleClick offers services for online advertisers, ad agencies and Web publishers for managing, delivering and measuring online advertising. The company had roughly $150 million in revenue last year, according to a person familiar with the matter. More than $100 million came from serving ads for publishers to their Web pages and delivering the ads to be served on behalf of advertisers, this person says.

My Take? It could be a good deal, but;

• Strategically it could make sense but the suggested acquisition price is way out of line.
• Google is moving into this space so DoubleClick's existing revenues and margins are likely to shrink.
• Third, as ClickZ points out, AOL, DoubleClick's largest customer is likely to leave if a competitor like Microsoft buys them.
• Fourth, a fellow Microsoft employee just pointed out to me that, DoubleClick's DART system has an enormous collection of cookie and clickstream data on its customers that could raise competitive and privacy concerns.

Lets look at the numbers. Hellman & Friedman acquired DoubleClick a little over a year ago for $1.1 Billion. Since then, according the WSJ, they have divested two divisions of the company for $525M, leaving a net investment of about $600 million. And they want to sell it for $2 billion? Ya , right.

The revenue multiples don't make sense either. According to the Wall Street Journal, DoubleClick had about $150M in revenue last year with about $100M coming from ad placement. Presumably the rest of the revenue came from businesses that were divested. So, H&F wants 20 times revenues for DoubleClick? Maybe 20 times earnings would make sense, but 20 times revenues? You have got to be kidding?

Larry Dignan at ZDNet has four reasons Microsoft should acquire DoubleClick;

• DoubleClick, which serves ads and tracks them, would bolster Microsoft's Adcenter, which is lagging behind both Google and Yahoo. With DoubleClick, Microsoft would have a suite of advertising services and software. And we all know how Microsoft just loves suites.
• DoubleClick would give Microsoft a big chunk of the online advertising market. Redmond's biggest worry is that the software industry will move to ad-supported applications and leave it in the dust. With DoubleClick, Microsoft would at least capture some chunk of the online advertising market.
• DoubleClick would bolster Microsoft's management ranks. Why is Microsoft so far behind in online advertising? It doesn't have the expertise that Google and Yahoo have. DoubleClick could change that a bit–assuming managers stayed with Microsoft of course.
• DoubleClick needs a partner. The Journal is reporting that Google will announce a DoubleClick-ish service in upcoming weeks. If you're DoubleClick and that oncoming train is Google why wouldn't you find a big brother like Microsoft?

I agree with Larry Dignan on the strategic thinking. At some price this makes sense...but not at anything close to $2 Billion. Billion dollar acquisitions are very difficult to integrate and very rarely produce synergies. Microsoft certainly has plenty of cash to make the deal, but our history is to not overpay for deals. On the other hand, the value of acquisitions is all about what the acquirer can do with them in the future...not what they do now. A company like Microsoft could leverage DoubleClick's technology across their entire network of sites and future services to create much more value than exists today. 

Billion Dollar Gambles - Small acquisitions ($50M to $100M) are easier to integrate, easier to leverage and find synergy, and carry less risk if they fail. Everything is harder with a billion dollar acquisition.

Several months ago I asked Marissa Mayer, Google's VP of search products, about the thinking behind the dMarc Broadcasting acquisition. Google acquired dMarc, a radio advertising placement company, for $1.24 Billion dollars. I didn't understand the price or the strategy. Marissa said Google believes advertisers want to consolidate the placement, management and payment for ads all in one place. They believe they can bring efficiencies to the market.. They also think they might be able to employ their ad auction model to get advertisers to competitively bid for ad spots rather than just pay the same standard rates for all ads. Interesting, but does this play to Google's strengths?

Google has plenty of cash and very valuable stock currency but at the end of the day all investments have to make sense. Spending up to $1.24B on dMarc Broadcasting with negligible revenues and little synergy to Google's business made no sense to me. A year later I still don't get it. Ya, I know...I am slow.

The YouTube acquisition for $1.65 Billion is another one that made no sense to me. No revenues, questionable business model, huge legal risks, and a completely different business...content. Google is not a content company. They don't own or host content. They provide search services to FIND content and place relevant text ads along side the results.

For more on why Billion dollar acquisitions rarely make sense, see my previous post "The Worst Billion Dollar Internet Acquisitions of All Time"

DoubleClick could be a good strategic fit for Microsoft's AdCenter and online business. At some price it makes sense. The numbers have to work. Heck, Microsoft can even overpay a little and make it work in the long run. But, at $2 billion...I would pass.

Comments

[Steve Morsa]

Don, I was going to say that; when I first heard about MS's interest in DC; that it seemed to make sense.

You've changed my mind.

If you feel "comfortable" saying, what do you feel DC IS worth?

...and dMarc and SueTube were terrible purchases. The difference here is that at least w/dMarc only their eventual earn-out purchase price is at risk...with SueTube, they could lose billions more...

[Anon]

Don, you might want to take another look at your numbers. It seems like someone else did some digging into DoubleClick's old SEC filings and your revenue estimates are off. DoubleClick reported 126 million in adserving revenues in 2004 while you state 100 million right now?

http://blogs.business2.com/beta/2007/03/microsoft_exec_.html#comments

[Spencer Ferguson]

I must say, I was 'gung ho' about Microsoft buying DoubleClick... until I read your post. What a ridiculous asking price!

[mathew]

score:
heller ehrman bsd's 1, google dealmakers 0

[Juha]

So... $3.1 billion then.

:)