Monday, December 19, 2005

Google - AOL

Google's much-hyped investment in AOL illustrates the value of keeping deals as simple as possible. There can be a great deal of pressure, particularly in large organizations, to structure deals in a way that mitigates the most risk and pleases the most constituencies. That's fine in some cases, but not in a competitive bidding situation, and particularly not in a case like this, where the stakes were so high for Microsoft's opponent. Google NEEDED to keep AOL close, and Microsoft should have pulled out the stops to prevent this from happening.

Sure, valuation had a lot to do with it, but AOL certainly could have gotten the same price from Microsoft. However, while Google's deal is a straightforward minority investment with some ancillary commercial deals, Microsoft apparently insisted on structuring its investment as a joint venture.

If you're AOL, would you rather deal with an investor or a JV partner (with all the attendant minority rights, exit and management issues)? Couple that with Google's greater willingness to push the envelope on promoting AOL's ads, and this was probably an easy decision for AOL even if the parties were even on valuation.


Anonymous said...

This goes to show how much MSFT suffers from hubris. MSFT needs to dramatically improve its ability to do smart, value enhancing, deals.

MSFT has a huge opportunity in front of it but it will need to become much smarter with it corp. dev function in order to capitalize on its opportunities

Josh King said...

Probably true, although most big companies get hamstrung by cumbersome processes, bureaucracy and the lack of a risk-taking mindset among employees. The corp dev function is uniquely placed to cut through all that, but only if the team is either a) highly talented or b) highly placed/valued in the company (or preferably both). I suspect with Microsoft the problem is the latter.