Wednesday, October 18, 2006

Is the Google/YouTube Deal a Star or a Dog?

When Google bought YouTube for $1.65 billion in stock, the press predictably went into a frenzy. But in analyzing any acquisition, it’s important to get past the hype, because well over half of mergers and acquisitions (M & A) wind up destroying shareholder value.

In my new book Break From the Pack, I present a “6T Blueprint” for making acquisitions that will help an organization become more successful, not simply become bigger. Let’s examine the 6 T’s and see how the Google/YouTube deal fares.

1. T1=Tomorrow. Does the acquisition position the new (combined) company for success in tomorrow’s playing field; that is, in emerging, fast growth businesses that will define tomorrow’s marketplace? This is an important question. If an acquisition primarily improves the economies of scale of current processes, or cross-marketing opportunities of current products, or the share of a current market, it’s likely to have lousy long-term value. In other words, if Google had acquired YouTube simply to gain access to its 100 million video clips and its 50% share of the online video market, it would have been a poor decision. In fact, I give Google fairly high marks on T1, because the company sees the "tomorrow" possibilities. The online video market might well be the next evolution in news, entertainment, and possibly the Internet itself—and Google is now positioned to innovate it and dominate it now that it has collared the hottest brand and the strongest online video community.

2. T2=Top Technology. Does the acquisition allow the acquiring company to obtain a specialized or new proprietary technology that offers measurably quantum improvements in response time, customer care, product innovation, and penetration into tomorrow’s market? I give Google low marks on T2. There’s nothing particularly earthshattering or proprietary about YouTube’s technology. If anything, it’s Google’s technology that will give bigger scale, better search capabilities, and newer application to YouTube’s.

3. T3=Top Talent. Does the acquisition bring in an abundance of top talent people who possess genuinely state-of-the-art, cutting edge expertise and experiences. The answer is no. Google didn't need YouTube for unique talent, nor did it get unique talent. T3 is another mark against the deal.

4. T4=Turbo-Time. There are two parts to T4. First, will the acquisition make the new company faster? (All too often, acquisitions make the new company slower and more sluggish). On T4, I give Google a so-so because I don’t think the new company will be any faster or any slower. The second part of T4 is: Will the newly acquired company be absorbed and integrated quickly. Here, I rate Google higher. The two companies are neighbors, their cultures are similar, and they’re integrating intangibles rather than huge factories and distribution systems scattered around the world. The integration should be relatively smooth, though keep in mind that other Web acquisitions, like ETrade/harrisdirect and Ameritrade/TDWaterhouse have proven far more complicated and difficult than originally anticipated.

5. T5=Titillation. Does the acquisition create products and services that delight customers, that make them say “Wow!” Yeah, I’d say definitely. Google can now offer a search capability for a big, ever-expanding bunch of cool videos to complement its presence in data and text. (Too often, acquisitions generate products and services that are “me-too” commodities. Not so here).

6. T6=Tiny. Is the acquisition small? The research indicates that the larger the deal, the more likely it’ll fail. The smaller the deal, the more likely it’ll be easier to execute, and the more likely it won’t slow down the company, or lock it into a “today” position (rather than tomorrow), or devour its resources. It’s also more likely to be done for the right reason: to fill in a small strategic gap or hole rather than be a giant panacea for management that hasn’t a clue on how to grow the company organically. So how does Google fare? Hard to say. Relative to its $100 billion plus market cap, it’s a small deal. Relative to its $6 billion revenue, it’s not a small deal. I tend to be conservative and reference revenue, because revenues reflect the daily reality of the company more than market cap valuations which can be unrealistically inflated (remember how AOL bought Time Warner with its hyper-inflated stock right before its company’s stock crashed?) Nevertheless, since the deal was strictly stock, the collateral damage might be limited. Upshot: I give Google a so-so on T6.

Put it all together and we have a high score on T1 and T5, an okay or so-so score on T4 and T6, and a low score on T2 and T3. This means that the deal probably won’t be a failure, it might even be a genuine success, and it most likely doesn’t justify the fawning, breathtaking analyses that have accompanied it this month.


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