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Did Google make a mistake with DoubleClick?

Don Reisinger has crunched the numbers and found that the Google-DoubleClick deal was a bad move for the online firm. Is he right?

Now that the Google-DoubleClick deal has been approved by European lawmakers, the online giant has finally taken control over one of the most important display advertising firms in the world. And while some are calling this a great day for Google, I'm not so quick to agree.

What, exactly, makes this such a great day for Google? Is it because it can solidify its position as the world's premier online ad firm? If so, I thought it already was: Google's total share of online advertising revenue before the DoubleClick deal was over 60 percent and no company was even close. If it wasn't that, was it because Google finally had a leg up in the display ad business where it has floundered for years? Possibly. But considering that DoubleClick only generated about $365 million in revenue last year, I just don't think this is a major step forward for the company.

I simply don't know how anyone can say the Google-DoubleClick deal was good for Sergey, Larry, and Eric. And if you look at the numbers and what Google is actually adding in this deal, it looks even worse.

If you ask me, Google made a mistake.

Sure, that may sound counterintuitive considering almost every Wall Street analyst and tech pundit is doing all they can to pump up this deal and make it look better than it is, but I think that's not only ridiculous, but extremely foolhardy.

Let's consult the numbers:

Google decided it would pay DoubleClick $3.1 billion for the rights to the DoubleClick name and all of its accounts. In essence, it was a full acquisition. On paper, $3.1 billion certainly doesn't look like a major amount of cash, especially when you're Google, but consider the fact that that figure is the most the company ever paid for another firm and the chances of it recouping it anytime soon are slim to none.

Why, you ask? As it stands, DoubleClick's latest revenue figures for 2007 were estimated at $365 million and it has been operating at an approximate profit margin of 10 percent to 20 percent over the past decade.

Realizing this, DoubleClick, which used to be a public company, but was then acquired by a private equity firm, was estimated to incur roughly $30 million to $60 million in profits each year.

Assuming outstanding corporate synergy and proper management of the details, there's no reason to suggest Google can't reduce operating expenses by about 50 percent to 75 percent (an average figure for many combined efforts) and thus increase its profit margin on the new division by the same factor. If it can do just that, the profit margin could increase to well over 60 percent, thus allowing Google to enjoy an annual profit of about $200 million.

Sounds better, right? If so, consider the fact that even at that point, the company wouldn't see a profitable return on its investment for about 15 years. Still not too great.

But amid all of this number crunching, you also need to consider the fact that Google should be able to increase DoubleClick's revenue by a good amount. From 2004 to 2007, DoubleClick's revenue grew by about $75 million, representing a 25 percent growth over that period. That said, Google has enjoyed extraordinary growth over the past few years and actually witnessed a 67 percent growth in ad revenue in 2006 and slightly less in 2007.

Assuming those figures, I think it would be fair to say that we can take an average of both companies' revenue growth and project that forward, creating a 50 percent (for ease of math) growth in revenue each year in DoubleClick's revenue.

Assuming that, the profitable return on investment could be reduced by about 7 years, making it possible for Google to recoup its money by 2016 or slightly later.

Taking all of those numbers together, who can possibly say Google made a good deal with DoubleClick? Sure, the possibilities of controlling online advertising are enormous, but the company most certainly made a mistake in its valuation.

And it's for that reason that Google will not only rue the day it acquired DoubleClick for that price, but will need to find a way to turn the tide and somehow increase its business by an astounding level to make shareholders happy.

The Google-DoubleClick deal was a mistake from a financial perspective. It's as simple as that.