YouTube and Sequoia Bullish on Google

Gold stars to YouTube, Google, and their respective investment bankers for how they handled this one...  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.

It's also worth noting that Sequoia and YouTube could easily have taken some cash off the table, but instead chose to go long Google stock at more than $400 a share.  Yes, there are tax considerations, but if you think Google's stock has top-ticked (or even if you just wanted to reduce risk), you would take some cash. Both Sequoia and YouTube obviously have insight into Google's performance in Q3 and the current quarter, and neither party, presumably, would want to celebrate the closing of the deal by loading up on a tanking stock.  The exchange rate has yet to be set, so Sequoia and YouTube could be gambling that a bad third-quarter report will temporarily hobble the stock, but this seems a bit too clever.  So, on balance, amid the Yahoo-problem-or-industry-problem worries, probably a positive stamp of approval on Google's current business trends.

(Thanks to Battelle for the cool graphic)

Comments

[King Troll]

FIRST BITCHES

[JIm]

The deal should be very positive and cement Google's leading position in the industry. It preempts Yahoo! or MSN from getting a foot in the door. I believe this is really a great deal for YouTube, for Google, for the VCs invested in YouTube, for advertisers and users.

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[Bruce Hamm]

Just remember that MSN and Yahoo are bringing in over $50M in video based revenues today - lower audience, higher quality play for advertisers. Look past the hype and critically analyze what assumptions have to come to pass here - they are not slam dunk variables.

[john]

Has anyone thought of the q3 quality score changes that goog implemented? Many of my keywords have increased in price from 300-1000 % in order to keep them active. While this sucks for me, I continue to pay due to the success of my advertising with goog. I think this is something that a lot of people are overlooking for this Q IMO>

[vic]

Hey Henry, Missing the quarter may not be such a bad thing for YT and Sequoia. Imagine that they price after a earnings blow-up and the stock is down 10 - 20%. Well, they make out like bandits on the short-term gyration as they set their exchange rate and ride off into the sunset with 10 - 20% more GOOG. Not a bad deal I say. Perhaps GOOG told them that they missed the quarter and will price after the melee. Perhaps also too clever me thinks...

[Dave Stutter]

"It preempts Yahoo! or MSN from getting a foot in the door."

Even a YouTube/Google combo places only 3rd in video streams initiated in the latest monthly numbers. It would be behind MySpace and Yahoo! I think Google is the one that couldn't get its foot in the door. http://internet.seekingalpha.com/article/18045

Doesn't it say something when a company is supposedly snapping up every genius on earth and they need to make a $1.5 billion purchase for a less than 2-year old company with 65 employees that resides a few miles from Mt. Google? What exactly are the Google geniuses doing with their "20% time"?

That being said, what the hell? Henry is right. They paid 1% of their marketcap for a huge marketshare gain in online video. They may as well use the marketcap while they have it. I'm sure Yahoo! would've made a better effort if the stock wasn't so beaten down.

But Google having to pay their way to the top isn't a very positive long term indicator when they're success has been attributed to innovation.

[sufiy]

On this deal WEB 2.0 has turned into bubble 2.0. Google has admited that inside nothing substantial could be created, the main logic was "if we will not buy it MSFT or AHOO will! And then what...Google will vanish? Where is all that brand strength, dominant market share? The truth is it is one stream revenue business, competitors just ONE CLICK away, cost swith for customer Zero. Look at their CC about the deal: company is under hit of contracting revenue growth and most importantly FCF, which will bring valuation and stock price down. The most interesting for me is how they are gonna make this q, numbers are gonna be very tought to meet.

[an_observer]

As a stubborn GOOG bull since IPO, I actually thought Google is going to miss Q3 significantly. Many things went wrong this quarter. I even thought so before Yahoo raised their red flags.

Could Sequoia and YouTube do the deal without reviewing the latest books in details?

[Mr Wave Theory]

Below are the Google (Nasdasq GOOG)/ Youtube comments from Wall Street Analysts. All of the firms below make markets in Google stock and/or options, so take their advice with a grain - make that 2 grains - of salt.

While it is counter to Google's general preference to build rather than buy, and the company already has a similar offering in Google Video, we believe Google recognizes the value of YouTube's leadership position and its strong brand name in the fast-growing video space. … By owning YouTube, Google may be able to bring content holders to the negotiating table earlier and in a more strategic way than otherwise might be possible.
--Douglas Anmuth at Lehman Brothers, who has an "overweight" rating and $530 price target
* * *

More analyst comments...

http://mrwavetheory.blogspot.com/2006/10/google-youtube-wall-street-analyst.html

[C. Fischer]

Henry,

Vic (above) is right. Since this deal will almost definately price after the earnings release, that would seem to imply the earnings may not be so good. If YouTube truly had insight in the Google quarter, why would you agree to a stock deal when you know it's going to be devalued by some percentage in the near term?

[C. Fischer]

Observer,

What do you think has gone wrong?

I think John (above) is bringing up an interesting point that I haven't heard anyone talking about - the July 11th decision to raise minimum bids on lots of keywords. Google has talked about this for a while and I don't think the timing of it for this quarter was an accident. Does anyone (Henry?) think this will have a significant impact to revenue numbers, or is this really done just to improve user experience as google is claiming (they cynic in me doubts it.)

[walt]

Successful investing requires prescience of events before everyone else AND the courage to act on that prescient knowledge.
For those here who spinning the conspiracy theory that GOOG and Youtube are aware of an impending cratering of GOOG stock price due to Q3 results; your path is obvious. Short GOOG.
You've already done that, right?

[franck]

Hello everyone..Does anyone here have any idea about which were the investment banks from both side?

[LC]

I agree with Henry, Sequoia and YouTube should have clear insight into Google's result in Q3. The all stock deal gave a good hint of Google's great Q3 result. Remember, Google has $10 B cash....

[sufiy]

More news on slowing advertisement

"CNet also lowered its revenue outlook for the third quarter, citing weaker-than-expected advertising demand. The company now expects revenue of $92.8 million, below its previous forecast of $93 million to $96 million.
Also, CNet lowered its 2006 revenue project to $376 million to $386 million from the previously stated $386 million"

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B8792D93B%2D1413%2D4674%2D8B5A%2D1BE9F8CEA50A%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo

http://sufiy.blogspot.com/

[Jake Wolf]

No matter how bullish big and humungeous banks are on Google, I am still loading up on puts right before Google releases their 3rd quarter earnings. I'll be blogging all the way to the bank with YouTube's smart sellouts.

[Victor]

Henry, let's talk about Facebook. What do you think the chances of that deal going down are? What will Yahoo pay? Is it a good idea?

[abe]

When does this become a business problem: http://www.examiner.com/a-339060%7ERobert_Cox__When_will_the_right_recognize_the_cost_of_conceding_Web_2_0_.html

[Jeremy C. Johnson]

I remember CSCO going from 40 to 20 in one day. That was a rough day. CSCO is still around and is a dominant force in the infrastructure business. GOOG will be a dominant force in the search business for a long time to come. I've used GOOG since close to the beginning. Love the product. But they will have a day where there stock goes from 400 to 200. It won't be Q3 or Q4. Too much monetization left in the bag. Eric hasn't put the Sun touch on the business yet. But it will come.

[Victor]

http://money.cnn.com/2006/10/13/technology/google_yahoo/index.htm?cnn=yes

nice article contrasting Google and Yahoo

[Victor]

Henry, what happened to the Google pool? I hope you're still running it :)

[Duf]

My theory is such: goog can only eat so much of the online advertising pie, as such being the market leader are you not at the most risk to feel max pain as ad revs slow? revs down...stock retests the 380 level.

[Network]

Great work, i like it. Thanks for sharing.
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