Consider: AOL and Yahoo made hay when Google went public. Both owned substantial stakes in Google due to earlier traffic deals, and both cashed out major paydays after GOOG’s IPO.
Consider also: The success of Ask Jeeves, from the time it tied its revenue fortunes to Google at around $5 a share (July 2002) to the point at which IAC purchased them at nearly six times that. Google did not own a piece of Ask, but given that Ask’s fortunes rose as soon as it did a deal with Google, I bet it wished it has asked for some Ask back in 2002…
So now consider this: Google is not going to make the same mistake. Why invest $1 billion in AOL? Well, should AOL go public, Google stands to profit – a lot. The company knows that by guaranteeing its business to AOL for the foreseeable future, it has in essence guaranteed AOL’s bottom line, providing a healthy earnings forecast for AOL and Wall St., should Time Warner decide to spin its erstwhile child back out as an independent public company.
Will AOL be taken public? My conversations with AOL execs lead me to believe the answer is yes, as long as the numbers look good. This Google deal takes care of that….and why would Google invest in a subsidiary of Time Warner, unless they were promised some kind of liquidity event?
Consider: The strike price for Googe’s investment is $20 billion. Google owns 5% of that, or $1 billion. So let’s do the math (again, watch out here, check my figures…). Google is on track to do more than $6 billion in high growth revenues this year, and it has a market cap of $130 billion. AOL will have far more revenue this year (it did $2 billion this past quarter and more than $8.5 billion last year), but due to the subscription/access business, it is not growing nearly as quickly. But a market cap of $20 billion? On revenues of more than $8 billion? That’s less than 3x revenues!
If AOL goes public and is seen by by Wall Street and others as the equivalent of a cheap ticket to Google revenue, it may well pop into Yahoo like valuations – to $50 or 60 billion in market cap or more. If that happens, Google’s makes a cool $2 billion on its 5% stake – close to what it made when it first went public. And this time, they don’t even have to do a road show….