Global Investment Banking: Roles Of Investment Banks In The Deal

Google Acquisition Of YouTube

Companies Background, Terms Of The Deal And Parties To It

Google was co-founded by Larry Page and Sergey Brin while they were students at Stanford University, and the company was first incorporated as a privately held company on September 7, 1998. Google’s venture into the public domain took place in 2004, and raised almost $1.7 billion in the public stock market. The internet giant grew rapidly since its commencement, acquiring smaller companies such as Writely, JotSpot, and online video sharing site YouTube in 2006, and moving into the office software market with the release of its Google Apps Premium Edition in 2007. Furthermore, Google is also involved in numerous cooperation partnerships with other corporations, such as NASA, Sun Microsystems, Time Warner’s America Online, and NewsCorp’s MySpace (New York Times, 2004).

On the other hand, Godwin-Jones (2007) stated that YouTube is a popular video-sharing website where users can upload, view, and share video clips. According to Sterling and Greg (2006) YouTube was started by Chad Hurley, Steve Chen, and Jawed Karim, three 20-something employees of PayPal, with an aim to share videos with their friends and the site was formally activated on February 15, 2005. Nearly 20 million people now visit the site monthly and about 100 million videos are watched on a daily basis, and about 65,000 videos are uploaded each day (USA Today, 2006).

According to Krishnamurti and Vishwanath (2008) acquisition is the purchase of by one company (the acquirer) of a substantial part of the assets or the securities of another (target company).On October 9, 2006, the popular search engine Google, acquired a young startup YouTube for a sum of $1.65 billion in stock and the deal was finalized on November 13. YouTube was already one of the most widespread sites on the web with 72 million users as of August 2006 in spite of being a year and a half old (Arrington, 2006).

Additionally, under the conditions of the deal, YouTube will keep its identity and will keep its name and its office in San Bruno, Calif., in excess of 25 miles from Google’s base camp in Mountain View and all YouTube employees will remain with the company. Google will keep running Google Video. According to Paul (2006), YouTube planned to continue functioning independently, privately, with its co-founders and 68 employees working within Google (Erick &Schonfeld, 2017). Youtube will continue to build on its success as one of the world’s most popular services for video entertainment. Hence the agreement between Google and YouTube came about after YouTube presented three agreements with media companies in an effort to try and avoid copyright-infringement complaints.

Rationale Of The Deal

According to Arrington (2006), the company has to take into consideration numerous factors before making mergers. For example the present value of cash flows, book value of the firm, cost of financing et cetera. For Google, it would not want to pay for the present value of the future cash flows because the opportunity cost of doing so would be reinvesting in its own business hence nothing will be to gain from a transaction with no net present value and the discount rate for Google would have been very high. For YouTube, it would not want to take market value but rather something higher. Both Google and YouTube needed to feel the value in the combined entity that will eventually be reflected in the value of YouTube. Google felt that this was the case, but it may have had less to do with the inherent value of YouTube than with the strategic value of outstanding Yahoo, the rival firm that was reportedly tangled in bidding war with Google for YouTube (New York Times, 2006)

[bookmark: _Hlk22266188]Hardy, Quentin and Hessel (2008) argued that one of the reasons Google purchased YouTube was because Google wanted to be the default platform for user-generated content, because being the default platform for content makes them the default ad network. At the time when Google acquired YouTube, it was clear that video would become one of the most valuable forms of content . YouTube lead with ‘over a billion users’, ‘over 100 million hours viewed daily’ – the kind of metrics that make an ad platform valuable. Hence YouTube remains unprofitable (YouTube: 1 Billion Viewers, No Profit), but the article mentions that competitors are trying to build video hosting, which is a clear indication that there is long term value in the business.

Hardy, Quentin and Hessel (2008) added that, in addition to its promise as the basis for ad targeting and delivery, video was a logical target for Google for two other reasons. First, they are one of the few companies with the scale and resources to deal with the mind-boggling data and bandwidth volumes necessary to service this segment. This is not a game for start-ups or companies that have to grow on their own positive cash flow. Second, to truly leverage video content for ad targeting and delivery requires a heavy investment in R&D. The more metadata they can associate with video, the more they can monetize the content through ads. To make video searchable requires voice recognition technology to convert speech to text, and image recognition technology to parse video frames. Google has the budget, talent and head start to win at both of these endeavours.

Secondly, Google mainly acquired YouTube to thrive in an area of the internet they did not succeed to be a big player until then, namely online video traffic. Moreover, youtube agreed to join forces with the google team because google demonstrated how great ideas can change the way people find and use the information and they will also be able to create a media platform for consumers and partners to distribute their media worldwide and focus more on copyright protection since Google has more financial and technological resources to dedicate to the issue (Monica, 2006).

Monica (2006) continuing stating that by acquiring YouTube, Google managed to buy the biggest share of the market. The market shares were as follows back in 2006: Google Video had 10%, my Space had 24% and YouTube had 46%. If you look at the market nowadays, you can guess who is still in the run and which company lost the interest of their user. While there are various reasons for larger corporations to acquire start-ups, Google did not do it to kill the concurrence, but to enhance their product portfolio. YouTube is not only one of the biggest video platforms on the market nowadays but also the second biggest search engine after Google. “Possessing“ both, Google and YouTube, could also mean Google is in a monopoly since they can influence the market on their own.

Thirdly, Google acquired YouTube because Google realized its potential to generate a ton of ad revenue. Google was able to expand its ad serving content to a whole new type of content, video content, instead of just search ads and display ads.

Roles Of Investment Banks In The Deal

Investment banks serve a number of purposes in the financial and investment world . one of which is provision of advisory services. The investment banks gives advisory role for both sellers and buyers of businesses, offer advices on raising capital through alternative means and also advises their clients regularly on all aspects of financing. In this deal,

Secondly, investment banks with underwriting services help firms to raise funds by issuing securities in the financial markets. They structure the transactions by verifying financial data and business claims, performing due diligence and, most importantly, pricing claims. The services provided are labelled as “underwriting” because investment banks actually purchase securities from the issuer and then resale them to the market. practical part

Thirdly, investment banks handle mergers and acquisitions as it evaluates the worth of a possible acquisition and arrives at a fair price. Investment banks also assist in structuring and facilitating the acquisition to make the deal go as smoothly as possible. For example, When google wanted to buy YouTube, one of the main investment bank, Credit Suisse, acted as an adviser on a deal by advising google on its purchases

Problems Encountered And Solutions

Rajakumari and Kumar (2007) argued that, though the content on YouTube was user-generated some people posted music and videos they did not have the right to post thereby violating copyright laws. However, YouTube immediately removed the clips once a copyright violation was brought to its notice. To avoid potential lawsuits the company had signed agreements with several music companies and was in the process of creating technology that would assist identify and prevent copyrighted material from being uploaded. Despite the fact that user-generated video websites were a great success, YouTube did not have a proven business model and was unclear about how it would create revenue in the future.

Like most large corporations, Google’s businesses have drawn some controversy, such as copyright disputes in its book search project, or accusations of censorship of search results as it works with countries such as France, Germany, and China. Recently, on March 13, 2007, Viacom filed a US$1 billion lawsuit against Google and YouTube alleging massive copyright infringement. Moreover, in the post-September 11 era, several governments have raised concerns about the security risks posed by geographic details provided by Google Earth’s satellite imaging.

How Conflicts Of Interest That Might Have Arisen

According to Mayer and Louw (2012) conflict frequently arises during an organizational acquisition. Many people try to avoid conflicts at any cost while others tend to blame someone or something else for causing it, however, we may rely on a general statement speculating that conflict arise as an outcome of dissatisfaction, disagreement, structural organicity, or contrasting norms, values or beliefs or simply incompatible interests between individuals or parties, poor communication (Rahim, 2010). Roloff (1987) argued that organizational conflict occurs when members’ acts are incompatible with the others within their social reach.

Furthermore one of the cause of conflicts can be the potential misuse of private information. For example, a bank might (privately) know that the default risk of one of its client has increased or will be increasing and bank might have an incentive to assist the firm in issuing securities to the investors, in order to fund the firm to pay-down its debt. The Glass–Steagall Act of 1933 was aimed at preventing exactly this type of behavior, which was considered one of the causes of the financial market crashes. Even when providing advisory services, investment banks might misuse their private information. For example, a investment bank exposed to a financially troubled firm might recommend the acquisition of a target with a sizable cash flow, with the only purpose of paying down the debt.

Mergers and acquisitions are undertaken with the belief that the combined companies will be able to grow more rapidly and be competitively stronger than they were as independent companies. Both the management teams of both companies face ethical dilemmas prior to beginning the merger, as negotiations proceed and after the transaction is closed Sherman(2010). Examples of this ethical dilemma include disclosure by the target company, unfriendly takeovers, confidentiality et cetera. For example, the company being acquired is often called the target company. When negotiations begin, its management team faces the issue of how much to disclose about the company’s current operations and future prospects. They might be aware of competitive factors that will make it difficult for the company to retain its market share in the future. Disclosure of such negative factors can cause the other company to offer a lower price to the shareholders of the target company or decide to not go through with the merger at all.

Hambrick (2005) states that in order to solve the conflicts effectively teams need to be able to create a climate that promotes open and honest discussion of issues. For example, developing new attitudes towards conflict, developing trust among team members, working collaboratively, and enhancing the team emotional intelligence. Once the right climate is established, team members need to use constructive communications techniques to make sure things stay on the right track. This includes listening carefully, sharing thoughts and feelings, and collaborating to develop creative solutions to problems.

References

1. Evans, D. M. (2008). The Analysis of Mergers that Involve Multisided Platform Businesses. in Journal of Competition Law & Economics(4(3)), 663-695.
2. Godwin-Jones, R. (2007). Digital Video Update: YouTube, flash, high-definition. [online]. From http://www.allbusiness.com/technology/4051526-1.html
3. Google closes the $A2b YouTube deal. (2006, November 14). The Age. Melbourne. Reuters.
4. Hardy, Q.,. (2008, May). GooTube. Forbes Magazine. Retrieved July 5, 2010 from http://www.forbes.com/forbes/2008/0616/050.html
5. Kumar, R. a. (2007). YouTube’s Acquisition by Google: Issues and Challenges.
6. Li, J. a. (2005). Factional Groups: A New Vantage On Demographic Faultlines, Conflict and Disintegration in Work Teams. Academy of Management Journal.
7. Livingston, M. &. (2007). Investment bank reputation and the underwriting of nonconvertible debt. Financial Management. 21–34.
8. Louw, L. M. (2012). Exploring the relationship between value and life orientation and job satisfaction. Acta Commercial. (12(1), 44-66.
9. Monica, P. R. (2006, October 9). Google to buy YouTube for billion. Retrieved October 9, 2006
10. R, P. (2006, October). Google to buy YouTube for $1.65 billion. CNNMoney. CNN. Retrieved October 9, 2006
11. Rahim, M. A. (2010). Managing conflict in organizations. Transaction Publishers.
12. Rochet J.C, J. T. (2003). Platform Competition in Two-Sided Markets. in: Journal of European Economic Association( 1(4)), 990-1029.
13. Roloff, M. E. (1987). Communication and conflict.
14. Schonfeld, E. (2017, August ). Chad Hurley’s Take From The Sale Of YouTube: $334 Million. TechCrunch.
15. Sherman, A. J. (2010). Mergers and Acquisitions from A to Z.
16. Sterling, G. (2006, August 31). YouTube Video and Usage Facts. Sterling Marketing Intelligence.