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….
Interesting thought process. And not far fetched, IMHO. I guess they could still get “bought” vs. an IPO, but the question is “by whom?” The GOOG relationship diminishes the value for any other obvious buyer (e.g. YHOO conceivably cut out from installing Overture, likewise MSN with their Search). Maybe IACI would take a run if they were willing to forego Ask powering AOL search (a reasonable assumption, certainly now, for them to get any deal done). An IPO would almost certainly be at much higher multiples, but in any case GOOG wins.
Not a bad bet, John.
– Stuart
John,
You’re spot on. I made the point that we very well could be seeing an AOL IPO, Part Deux in the offing. While I don’t think GOOG had an AOL IPO in mind [or at least not as a driving factor in the AOL stake], I DO think Time Warner had the $20 billion post-money valuation in mind when they agreed to the $1 billion from Google in exchange for 5%.
You may have seen my post directly or on tech.meme, but if not…
http://woodrow.typepad.com/the_ponderings_of_woodrow/2005/12/aol_ipo_part_de.html
AOL 60 billion post-IPO !!! Good grief !
I would base the value of AOL on 2 facts. Current earnings and the expected growth in earnings over the next 2 years. Is this data too confidential to be blogged.
60 billion? You are crazy. 😉 As Rajesh says we need to know the earnings an expected growth in earnings to value AOL. With actual earnings of 1-2 billion $ and an annual earnings growth of 20% I could accept 60 billion $.
John – I agree with your post for the most part, but there are two other reasons why Google would invest: to protect revenue and keep Microsoft at bay. Both of those are just as important as the value of the investment increasing at this point.
@ Jojo … i see it like you with the costs and i think, thats google need some invoices… it goes against end of year.
in future it is interesting and important for microsoft to do better work if they not want that the users goes from msn to the new bigOne 😉
I doubt Google’s looking for much of a financial return, *if* the deal even happens. Damian has it right, Google keeps some revenues and blocks Microsoft.
Clever thinking but I still can’t help thinking that AOL’s poor reputation will do more damage than Google will wind up recouping in an AOL IPO. Will people really want to own a piece of tired old AOL when they can invest in bright and shiny new companies with infinite potential?
Just because Google paid $1B for 1/20 of AOL doesn’t mean that AOL is worth $20B. Google may well have overpaid in order to shut out Microsoft. Two possibilities: (a) winner’s curse in an auction – whoever paid the most by definition paid more than anybody else wanted to pay, or (b) it was a good deal for Google because they got something extra beyond a share of AOL (i.e., delaying Microsoft’s growth in search – something that has no value to anybody else except Yahoo).
Whether (a) or (b) is true, it follows that all of AOL is worth less than 20x this deal, because nobody else would overpay by as much.
As dialup goes away, AOL is losing its one unique advantage: the large number of loyal customers who used it because it’s the easiest way to get online through a modem. (This includes myself: I still have an AOL account to use when dialing in from some obscure locations where they have access numbers and nobody else offers access. Such places are getting fewer by the year.)
Yes, maybe AOL can offer content and services on the open (non-dialup) Internet that can compete with Yahoo and best-of-breed sites, but it’s not a sure thing, and likely to be very expensive.
It’s true that AOL has been (and to a great extent still is) a dial-up ISP. However, it’s interesting that in Canada — where their ISP business never amounted to much for a bunch of reasons — as a “Hail Mary” they opened the door to much of their content. Guess what? They are now the number two portal roll-up (public web) in the Country. By saying “let’s face it, we are not an ISP up here” they have created some very valuable advertising real estate, and likely assured their future. I would be surprised if AOL US hasn’t taken notice.
– Stuart
Great reading, keep up the great posts.
Peace, JiggaDigga