Google’s Acquisition of
YouTube
Feb 20, 2007
Rachit Modi
Rateb Nori
Topics we will be covering:
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A brief history of Google
A brief history of YouTube
Synergies behind this Acquisition
The Acquisition
The Aftermath of the Acquisition
Google
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Started by Larry Page and Sergie Brin –
Ph.D. students from Stanford University
The search engine gathered a large
following due to it’s simple, uncluttered
and “clean” design – which turned out to
be its competitive advantage
Google was incorporated on September
7, 1998 and went public March 30, 2006
Total initial investment raised for Google
was $1.1 million – it now has a market
cap of $130 billion
Google’s Dual Class Share
Structure
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Class A Stock:
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Similar to common stock but with less voting
power
Class B Stock:
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More “ownership” than anything else
Has far greater voting rights than Class A
“By their ownership of 86,753,907 shares of
Class B common stock, three of the company's
executives (Eric E. Schmidt, Larry Page and
Sergey Brin) controlled 66.2% of the total
voting power of all the company's shares...even
though they owned only 31.3% of the total
shares outstanding” -ZDNet
Google
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Leading search engine with a 54%
market share, followed by Yahoo which
has only 23%
Google monitors the highest internet
traffic of any website – it gets the most
clicks and searches in a day than any
other website
Google.com is considered the most
valuable online “real estate”.
Google’s Revenue
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Google’s only source of revenue comes
from advertising – about $7.14 billion in
2006!
The company began selling advertising
associated with search keywords – which
is based on the number of hits users
make upon the ads.
Keywords were sold based on a
combination of price, bid and
clickthroughs, with bidding starting at
$0.05 per click.
Google Video
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Google announced Google Video on
January 5,2006
Google planned on a pay-per-view
service for its users to watch copyrighted
videos through partnerships with TV
companies such as CBS, NBA etc, but
that was eventually scrapped and it
allowed users to upload their own videos
for others to see
YouTube
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Founded by Chad Hurley, Steven Chen
and Jawed Karim – all former cofounders
of Paypal Inc.
Website was started in Nov 2005
It allowed users to upload their own
videos for other to see – the same
concept that Google Video was aiming
for.
YouTube
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By the summer of 2006, YouTube was
one of the fastest growing websites,
outpacing even behemoths like MySpace
As of a July 16, 2006 survey, 100 million
clips were viewed daily with an additional
65,000 videos uploaded per 24 hours
It has an average of 20 million visitors
clicking onto the website each month
The site has captured 47% of the online
video market, compared to Google's
11%
Google’s Previous Acquisitions
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All relatively small buyouts
Radio Advertising company, dMarc
Pyra Labs  created Blogger
Upstartle  created Google Documents and
Spreadsheets
Jotspot  wiki technology
All of these acquisitions were relatively small,
but with Google gaining huge revenues through
its advertising, it got access to greater buying
power - leading to the MySpace acquisition and
now YouTube
Synergies behind this Acquisition:
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Michael Cahill, managing director of
Manhattan-based Chilton Investment Co. said
”…we're moving from e-mail dominated traffic
to the MP3 player, and we are going ultimately
to video, and that is going to consume massive
amounts of bandwidth. With Google's (GOOG)
YouTube acquisition... we've witnessed
companies positioning themselves for video
over Internet"
Synergies behind this Acquisition
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Josh Bernoff, an analyst with Forrester
Research. "I think the combination of the
greater potential to make deals and also
the greater technical ability to solve
copyright problems puts (Google) in a
much better position than YouTube is (in)
by itself."
Synergies Behind the Acquisition:
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With YouTube in the Top 5 most viewed
websites, an acquisition like this would
significantly boost Google’s advertising
revenues - the “social networking” aspect of
YouTube drives this acquisition
Sergey Brin, Google's co-founder and president
of technology. "Video is a great medium for
advertising,"
More than half of the online video watching
market would be controlled by Google, similar
to the internet search traffic that the company
holds.
The Deal:
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Google paid $1.65 billion to the YouTube owners
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217,560 shares, and restricted stock units, options
and a warrant exercisable for or convertible into an
aggregate of 442,210 shares, of Google's Class A
common stock
The stock price was averaged over 30 days. The total
amount issued excludes $15 million provided to
YouTube between the announcement and the close.
12.5% of the transaction will be held in escrow for a
year to cover "indemnification obligations."
YouTube was to remain a separate service under its
own identity for the near future, though YouTube
search results may include Google Video clips, and
vice versa
The Aftermath
Hedge Fund Strategies
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Eric Gettleman, a senior associate at Goldman Sachs
Asset Management
You would take a long position on Google while
taking a short position on the industry the acquiring
company is in (online video sharing)
Similar to Risk Arbitrage for mergers
“Indemnification Obligations”
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Some analysts/critics say $1.65bn was too
much to pay for YouTube especially with the
legal issues of copyrighted videos being posted
on YouTube
“Viacom, the parent company of MTV and Comedy
Central, is demanding Google-owned YouTube to
remove all of Viacom's videos. "100,000 video clips
from Viacom-owned properties including MTV
Networks and BET has been asked to be removed."
Viacom reportedly claims "1.2 billion video streams"
have been generated by YouTube without permission
or compensation to the company.” - BusinessWeek
Catch-22
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Do you think it’s alright for Google to
share YouTube users’ information with
media corporations such as Viacom?
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A) Yes
B) No
Catch-22
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If Google complies, it risks angering
YouTube's users, many of whom want
their identity protected and some of
whom undoubtedly visit the site in hopes
of viewing leaked or copyrighted
material.
If it doesn't, it could frighten advertisers
about identifying their brands with
unknown user-generated content and
concern regarding exposure to copyright
suits.
So what do you think?
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Did Google overvalue YouTube by paying
1.65 billion?
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A)Yes
B)No
References
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Wall Street Journal
 http://online.wsj.com/article/SB116014813857884917.html?mod=technology_mai
n_whats_news
 http://online.wsj.com/article/SB116039852999986783.html
BusinessWeek
 http://www.businessweek.com/technology/content/jan2007/tc20070126_817521.h
tm
 http://www.businessweek.com/technology/content/feb2007/tc20070202_568443_
page_2.htm
 http://www.businessweek.com/technology/content/oct2006/tc20061010_083340.h
tm
ZDNet
 http://news.zdnet.com/2100-9588_22-6060691.html
Yahoo! Finance
 http://finance.yahoo.com/q?s=goog&x=0&y=0
Questions?