Novice Investing - AOL Comes Home with Google

Date: Monday 01st 2008f December 2008 05:05:12 PM

AOL Comes Home with Google - 12/16/2005

By: Novice Investing Staff

Come to Papa, my child. Finally, Wall Street Journal reported that talk broke down between Microsoft Corp. (MSFT) and Time Warner unit, American Online. Instead, AOL has resumed to talk with Google Inc. (GOOG), which has provided AOL with paid search advertising technology for years now.

What is the cost of getting your lost child back? $ 1 Billion. And, Google is not getting all of it. Under the deal, Google is to invest $ 1 Billion in AOL for a 5 % stake in the online media phenomenon. This put a valuation of $ 20 Billion for the whole entity of AOL.

There is no certain ways of valuing a company. If Google feels that it can get more by joining with AOL network, then it can bid that high. We estimated that AOL is worth $ 10.2 Billion based on its dial-up subscribers alone. The coveted online communities and web content apparently is worth $ 9.8 Billion, based on Google's investment.

Did Google overpay for AOL? The price seems fair at a glance. CNET Networks Inc. (CNET) with about 3 % of internet traffic is worth $ 2.2 Billion. Aside from its web content, AOL also owns the more valuable network of instant-messaging users of north of 50 million. 50 million users that interact regularly via an AOL instant messaging system, hmm. If each of this user spend about $ 100 a year on anything in AOL & Google web properties, then it represents a $ 5 Billion revenue. You can apply a multiple of 2 times sales just like we did with AOL's dial up subscribers. Or you can apply other multiple. You are also forgetting the traffic to AOL web content. Sure, they are interconnected in some way. But to give you an idea, AOL.com alone attracts 2.6 % of internet traffic which makes it worth around $ 2 Billion if we use CNET Networks as a proxy.

So, let's see. $ 10.2 Billion for AOL's dial up subscribers. $ 7.5 Billion for AOL's instant messaging subscribers ( 1.5 x times revenue), and $ 2 Billion for its AOL.com web traffic. We have not considered other AOL's properties and the above already adds up to $ 19.7 Billion. Apparently, this is a fair price for all at this moment. If Google can leverage their partnerships to gain more revenue, then the price tag makes a lot of sense.

Meanwhile, what is happening with Microsoft? We did not know the details of the arraignment. But, financial wise, Microsoft can afford to buy out even the entire AOL properties. Perhaps, Time Warner was bulking out of the deal. Or, perhaps Microsoft was wanting more ownerships for the deal. If the deal of AOL and Google does happen, Microsoft is in unfavorable spot. MSN search currently ranks third with 10+% share behind Yahoo! and Google. Google is the king with 50 % market share, five times more than Microsoft.

With the AOL deal, Google can solidify its lead even more. Microsoft need to find an equable partners fast. Or else, it will be left behind very far by Yahoo! and Google. AskJeeves comes to mind. It is # 4 in search engine share. However, it was just acquired by IAC/Interactive Corp. for $ 1.85 Billion on March of 2005. We don't think IAC would want to sell out after owning Askjeeves for nine months. Perhaps, Microsoft Corp. can buy the entire IAC Interactive. It is worth $ 8.85 Billion in market capitalization as of Friday December 16th 2005. Microsoft certainly can afford to buy IAC Interactive. Time will tell. We will update you again when that happens.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Google Inc. (GOOG) or any other securities.

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