Google and Youtube - One of the Best Takeovers in History?

I've been updating my records of large takeovers and mergers in recent years and looking at whether shareholder value was created or destroyed by each deal.

One takeover which strikes me as being highly successful is that of YouTube by Google. Here is some evidence that supports that view.

Back in 2006, the acquisition of YouTube by Google was the search engine giant's largest takeover by value.

YouTube was bought for $1.65bn (paid in Google shares).

At the time of the takeover, there was concern than Google would destroy the fast-growing video-sharing site, despite making a commitment to YouTube's 65 employees that the business would be operated independently. It seems the pessimists were wrong.

YouTube now generates annual revenues for Google of $3.6bn per year (Google's total revenues in 2012 were around $33m) and viewership grew by 50% in 2012 alone.

Investment analysts at Barclays estimate that YouTube's revenues will continue to grow strongly, rising to $4.3bn in 2014. Whilst Google doesn't publicly disclose how profitable YouTube is, Barclays estimate that YouTube achieves an operating profit margin of around 30-35% of revenues, suggesting annual profits of over $1bn p.a..

So how much is YouTube worth now?

Business valuation is more of an art than a science. However, a fast-growing and profitable online brand like YouTube would likely attract a high multiple of revenues or profit if it were ever put on the market (which is highly unlikely).

Even a conservative valuation of 10-15 times annual profit suggests that YouTube is now worth between $10-15bn. Which is significantly more than the $1.6bn Google originally paid. Google shareholders must be smiling...