The Most "Efficient" Brand

The potential of a Microsoft-Yahoo! deal is just too interesting to pass by, so I pulled together the data below from company filings and BusinessWeek's Top 100 Brands (Microsoft data is for the whole company because detailed numbers for its Online Services segment is not available, so it’s not exactly comparable to the other two).

To my surprise, Google’s biggest advantage in it’s profit margin comes from Sales & Marketing Expenses, at only 8% of revenue, compare to above 20% for both Microsoft and Yahoo!. Use BusinessWeek’s estimate, Google’s brand value is about 15 times its sales marketing expenses, while that number for Microsoft and Yahoo! are 6 and 5 respectively. This sure makes Google one of the most “Efficient” brand out there.

	Microsoft	Yahoo!	Google
Revenue	100%	100%	100%
Operating Expenses
Cost of revenue	17%	42%	40%
R&D Expense	15%	13%	12%
Sales & Marketing	22%	21%	8%
G&A Expense	8%	8%	7%
Operating income	37%	15%	33%
BW Rank by Brand Value	2	55	24
Sales and Marketing Exp.	9,818	1,322	849
Brand Value	56,926	6,056	12,376
B.V./Sales & Marketing	5.80	4.58	14.58

If there is going to be a Microsoft-Yahoo! deal, would Microsoft be able to create synergy by cutting into Yahoo!’s marketing expenses?

Microsoft buying Yahoo?

Rumors are flying…

If you think about it, this deal makes a lot of sense: acquiring Yahoo! Inc, currently valued at approximately $44b, is a good use of Microsoft’s some $30b excess cash. According to SearchEngineWatch, this would give Microsoft a 38.6% share in Internet search business, putting it in a better position to compete with Google. The question is, given Google’s big lead, whether the regulators will still seek to block the MS YAHOO deal on the ground of anti-trust.

U.S. Online Searches by Engine, January 2007 and February 2007 (%)
	January 2007 (B)	February 2007 (B)	Change
Total Internet population	100	100	N/A
Google	47.5	48.1	0.6
Yahoo	28.1	28.1	0.0
Microsoft	10.6	10.5	-0.1
Ask.com	5.2	5.0	-0.2
Time Warner	5.0	4.9	-0.1
Source: comScore Networks, 2007

M&A and LBO are still white hot (if not getting even hotter) in the U.S:

• ABN Amro deal has been quite a drama, with half a dozen big banks gathered round the table.
• Murdoch is going after Dow Jones, the owner of Wall Street Journal.
• Reuters is approached today for potential takeover.

BlackStone S-1 Filing

BlackStone's planned IPO is definitely the latest hype in the PE space. The pros are already having fun with its S-1 filing. WSJ/BreakingViews suggests that the managing directors at BlackStone should actually take a pay cut in order to maximize their personal wealth.

Barbarian at the Gate

Barbarian at the Gate

The story of $25 billion buyout of RJR Nabisco Corporation, a record KKR kept for almost two decades. An interesting read when today's LBOs are getting bigger and bolder.

The Billion Dollar Club

The latest hedge fund "Billion Dollar Club" survy by Hedge Fund Intelligence. With the biggest chunk of profit coming from prop trading and asset management, is Goldman still a investment bank or a big hedge fund?

Microsoft LBO

It seems my idea of a Microsoft LBO wasn't quite as original as I thought (darn it... but I was joking, really). Financial Times had an article last year to actually analyze the possibility:

• Private equity folk could do wonders with Microsoft (requires subscription, here is the full-text).

And here are three reasons it can't be done. With the size of PE funds growing at exponential rate, the first, and probably the most important reason, won't hold for long.

The Buyout Boom

Private Equity firms are setting record deal sizes literally every month:

• Sep 2006, A PE group led by BlackStone tookover Freescale in a transaction valued at $17.7b.
• July 2006, $21.2b LBO of HCA by Bain, KKR and Merrill Lynch.
• Dec 2006, Apollo and Texas Pacific Group bought Harrah's for $17.1b.
• This week, BlackStone closed yet another record deal with Equity Office, for $22.3b.

Here is a list of deals in 2006. Also, there is an article (requires subscription) in today's Journey about Goldman Sachs gearing up its own $20b Private Equity fund. So who's next? By all measures, Microsoft seems to be a excellent LBO target: it's cash rich, almost debt free and has a stream of stable cash flows. It's share price has not been doing so well recently. Yeah, it's a bit too big. At today's stock price, Microsoft has a market cap of about $300b. If the LBO is 15% funded with equity, the PEs would need to put up some $45b in cash. But with more PE funds clearing the $20b watermark, nothing is impossible... Who is who in Private Equity.