NEW YORK (
) -- Over the weekend, it was leaked out that
was interested in helping at least a couple of private equity players to finance a purchase of
Most folks have protested loudly against this possibility by concluding that such a deal would never get past the U.S. government. Google, with already two-thirds of the market share of the search space, would significantly increase that by taking over Yahoo!'s share and leaving the rest of the market to Bing, Ask Jeeves, and whoever else is left.
Of course, that is right. Google previously tried to strike a deal with Yahoo! after the 2008
buyout was pulled and before Carol Bartz signed up to outsource its search to Bing. That potential tie-up between Google and Yahoo! was discouraged by the government.
So why is Google leaking out this information now? These are smart guys. They know that search is a non-starter.
One cynical theory is that they have no interest in Yahoo! at all. They're merely trying to seem interested so that Microsoft will be forced to more aggressively bid for Yahoo!
With a company that
for the Nortel patents before
and a consortium of others won them, I suppose anything is possible. However, I just don't see what the point is for Google to do this.
Will leaking something cause Microsoft to bid $25 instead of $20 for Yahoo!? That would be the equivalent to an extra $4 billion to Yahoo! shareholders that Microsoft would have to pay out. That's not chump change, but is that really going to hurt Microsoft? And why would Microsoft really take such action based on one leak?
Which leads me to conclude that there is real interest by Google in Yahoo! However, I don't think it's for its search business.
I think the jewel for Google in the Yahoo! empire is its display ad business. That's a $2 billion a year business for Yahoo! and many believe that Yahoo! is dramatically under-monetizing it. What could it be worth under Google using DoubleClick's technology? $3 billion? $4 billion? Google knows better than us.
Doing $1 billion a quarter in additional display ads (or even if Google gets no lift from DoubleClick and keeps clocking Yahoo!'s existing $500 million a quarter) is significant to a company doing $9 billion a quarter.
Let's look at it this way. Core organic search is a flat business , even though it's a great business. So, to keep investors excited, Google has to pump up its new revenue streams like YouTube display, general display, and mobile search. Because the quarterly numbers are not very big in themselves, Google is a fan of reporting "milestone" annualized numbers.
In the Spring, Google trumpeted that it would do $1 billion in revenue from YouTube in 2012. Earlier this month, Google said they were doing $2.5 billion in annualized mobile search revenues.
Doing $2billion to $4 billion a year in extra ad revenue for Google would be significant.
Remember that Google's ITA acquisition paid big dividends in the most recent quarterly results for the company. Google bought the company for $700 million in 2010.
Nikesh Arora, Google's chief salesman, confirmed on the earnings call that the year-over-year impact of ITA was responsible for the growth of "other income" in the quarter.
Mark Mahaney, an analyst with
, commented in his post-call report that "$302MM was $106MM or 54% better than we expected. Taxes were also lower than expected, at 19% vs. our 20% tax rate assumption. If we account for these, Non-GAAP EPS would have been approximately $0.25 lower."
So, basically, Google would have missed on its quarterly earnings without the ITA acquisition. Mahaney goes on to say: "Did GOOG's Fundamentals Improve? Not Really. Organic year-over-year gross revenue growth (excluding FX & Hedging) of approximately 28% was roughly in line vs. the second quarter, and got a bump from the ITA acquisition. EBITDA margin of approx 54.9% was down 470 bps Y/Y and up 40 bps Q/Q."
So, if I'm right, Google needs revenue. And it needs need stuff that will move the needle. These display ads of Yahoo!'s -- even with their woeful monetization system -- move the needle for the Googleplex.
The play for Google is to get that display business and promise the government to divest the search business to Microsoft..
Could it work? I think it's a longshot but there's clearly a relationship already between the Yahoo! and Google set of co-founders.
At the time of publication, Jackson was long Yahoo!, Apple.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson