Monday, April 16, 2007

Show Me the Money

In astonishing news, Google has reportedly agreed to buy for $3.1 billion. The news comes as the Dow rebounds on reports of a $25 billion buyout of Sallie Mae and strength in the blue-chip sector. The news is quite wary due to the valuation of and the amount of risk Google is assuming. The report is broken down by John Shinal, a tech analyst, in an article on titled "Google Founders Veer Wildly From Buffet Playbook." The title comes from the interesting standpoint that Google's founders run their company the way Warren Buffet has run Berkshire Hathaway. Buffet is known for buying companies and assets that are undervalued to create value once the true value is known. In the purchase of, the Google founders have not shown they are purchasing on the cheaper side. When looking at estimated earnings report, is predicted to earn about $150 million this year. So, Google is paying a 20x earnings to acquire this advertising firm. The only reasonable explanation would be if they expect to growth at an exponential rate. On the other hand, Google also is expected to pay entirely in cash which is close to their entire 2006 operations. If Google was to pay for the company with stock, then if investors felt wasn't going to pan out then the stock would decline therefore decreasing the value given to owners. Since it is in cash no matter what occurs the risk is entirely on Google's owners since the payment is all cash. Though we should never judge to early since Google has a proven track record and obviously did not make this bid for no reason.

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