INVESTING: Google’s been outbidding Microsoft; is it overpaying?

Google hasn’t been around for even 10 years, yet it has the world’s wealthiest man and his company playing defense practically on their home court. In many cases, great defenses wins titles (our own Colts defense proved invaluable during this past season’s Super Bowl run) but the jury is out on whether Microsoft can successfully keep Google in check during this battle of technology heavyweights.

The real action began in late 2005 when Google paid $1 billion for a 5-percent stake in AOL. Microsoft was in hot pursuit of that deal. Then, a few months ago, Google bought Internet video provider YouTube for $1.7 billion. Microsoft also was in on the bidding, but decided Google’s high offer wasn’t worth topping.

Microsoft has been around for 30 years, and the corporation is full of brilliant people, so it’s worth noting when they don’t see the business sense of spending more than $1.5 billion. Something similar happened a few weeks ago when Google bought the online ad placement company DoubleClick. Microsoft was in the bidding there, too, but couldn’t see spending $3.1 billion.

I get the feeling Google has been overspending a little on its recent purchases. The YouTube deal looks especially excessive given the low barrier to entry into that type of business.

There are a few serious threats to Microsoft’s dominant hold on the operating system market. Free Linux platforms and Apple’s resurgence are two problems, but Google seems well-positioned to take business, as well. Google has been doing well offering free versions of products like e-mail services, on which Microsoft has long relied. But as with Yahoo, Google is reliant on offering free services to users, while earning money from advertisers hoping to reach those users. Yahoo has been the most visited Internet site for years, but the market value of the company lags both Google and Microsoft by a combined several hundred billion dollars.

But Google might be getting complacent in the midst of its tremendous success. Perhaps executives think anything they touch will keep turning to gold. But investors are the ultimate deciders, and recent stock price performance might be telling us something.

Google is trading at the same place it was in January 2006. Microsoft, in the meantime, is close to hitting its highest level since late 2001. Overall, there are pros and cons to both companies, and each likely will see higher stock prices over the intermediate term. Maybe Yahoo ends up winning the stock race by the end of the year. But even if you’re not investing in any of these companies, it’s fun to watch the action.

And action is the best word to describe the general stock market since the March bottom. With the S&P 500 approaching an all-time high, I continue to believe the strategy that has worked so well for us since late last summer will keep paying off. Buy the dips but don’t chase the rallies, and concentrate in materials, utilities, health care and select large-cap technology. Keep a wary eye on regional banks, as the residential lending market looks to stay weak for some time.



Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 829-5029 or at keenan@samexcapital.com.

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