A while ago, I published on my own weblog a critique of Google’s equity price that was very widely picked up by some other blogs, including some of the mainstream online press and investment banks. The essence of the argument was that at a price-to-earnings ratio of around 90, when compared to Microsoft’s meagre 20, Google stock was way, way overvalued and that the stock was heading for a plunge. Easy to say with hindsight, but I received a lot of criticism for it at the time of writing in November:
The only way that Google can possibly sustain this kind of price to earnings valuation is to actually deliver a viable desktop software before Microsoft comes out with its challenge next year. If it doesn’t, and the price of its shares starts to fall (as it surely will), Google is going to find itself having to split its current stock in order to attract more investors to its equity, a strategy that could lead it to decline further.
The prediction indeed came true: since the time of writing, Google stock has fallen by round 25%.
But they may just go one better than my previous dismal forecast. I’m going to make a unique prediction here:
Google is about to buy Sun Microsystems.
Last year Google announced a potential partnership with the ailing technology giant and has since announced such a deal with Dell – such announcements indicate a need for more technological capacity on Google’s part than they currently have. And they could hardly be better placed right now to acquire those capacities.
For one, Eric Schmidt, the current CEO of Google and former CTO of Sun, as appointed by Page and Brin, positions the organisation perfectly in terms of negotiating a reasonable price for the search engine goliath – and with the current market price as it stands, it wouldn’t have to pay very much either. Add to this that Google – now firmly in the black – can afford to swallow the negative earnings of Sun at the same time as using their expertise to deliver the much-needed software platform to sustain current revenues and the scenario looks increasingly likely.
As if all that weren’t enough, the numerous option excercising and sale of stock insiders at the company have been carrying out recently – only last week, Chairman Scott Mc. Nealy relieved himself of roughly ten million dollars in Sun equity – and it all seems a little too coincidental.
Here’s the anomaly. Consider the following three-month trading chart:
You’d never think it but here are the facts:
- Google stock has been experiencing a number of non-disclosed acquisitions.
- Sun has had investors exiting to the tune of eight figures on a market cap of ten.
- Microsoft meanwhile, sits more comfortable than both at a price/earnings way below the industry average and with a product – Windows Vista – which everyone is talking about coming out later this year.
These kinds of anomalies are typical in the behaviour of companies where acquisitions have been strategically arranged and are still in the ‘preparation’ phase. Google has to do as much of a job in showing benefits of acquiring Sun as it does in proving its own capability to turn things around there – and what better way to do it than show the growth potential of the company it is preparing to acquire?
Anyone who thinks Google can continue its phenomenal growth without a platform to combine hardware, storage, StarOffice, JAVA, and Solaris ought to think again – the combinations are the only competitive advantage that can enable them to trade at a P/E of 100 – and perhaps way above. Indeed, this was exactly what happened in 2000: too many technology companies relied purely on supposed revenues derived from ‘wandering customers’, rather than delivering the hard substance that drove the bottom line exterior to trends of marketing and advertising. Sun’s growth potential is what Google may well be looking to acquire – and that is largely stored in intellectual property, where Google hold their key competitive advantage: translating exactly this kind of property into cold cash.[ADBLOCKHERE]
My guess is that top brass at Google having been laying the groundwork for the cultural integration of the two companies without much concern for the price, which has probably already been hashed out.
As soon as Page and Brin steal this company, they’ll have a business model set in place that the market can’t argue with. Neither myself nor anyone I know owns any shares in Sun or Google, nor do I intend to buy any – I’m into analysis rather than speculation – but as for latter, I’d rate it a STRONG BUY right now.