MICROGAHOOGLE

Financial Analysis
by: “MicroGahoogle”

August 10, 2009

Instructor: Fransisco Ebreo

Group Members: Mei Lee, Janet Bai, Kevin Chan, Erica Westmen,

Laeticia Nkinsi, Ekaterina Belkina, Jeloirah Lailah Sikyang

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1. Executive Summary…………………………………...3-4

2. Company and Industry Information………………....5-8

2.1. Google……………………………………………….5
2.2.Yahoo……………………………………………...…6
2.3. Microsoft………………………………………….7-8

3. Financial Analysis……………………………………9-13

3.1 Liquidity Ratios…………………………………….9

3.2 Solvency Ratios……………………………………10
3.3 Profitability Ratios…………………………….11-12
3.4 Market Indicators…………………………………13

4. Current Issues……………………………………….14-20

4.1. Google…………………………………………...14-16
4.2. Yahoo……………………………………………16-18
4.3. Microsoft………………………………………...18-20

5. Conclusions and Recommendations…………………...21

6. List of References and Data Source………………...…22

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1. Executive Summary
Google's mission is to organize the world's information and make it universally

accessible and useful. From the beginning, Google had a lofty goal, but as time has passed,

Google has without a doubt shown its potential. Leading the search engine industry in market

share, Google is one of the largest and fastest growing technology companies in the world.

Driven by advertising revenues, Google has gained success by providing relevant search results

while also offering advertisements which are related to the content of each specific web page.

Additionally, Google offers a variety of free services and products, ranging from a myriad of free

search services, to Google Maps, to services available for mobile phones. Because these services

draw millions of users to Google’s websites every day, advertising revenues provide a steady

stream of income.

Yahoo!, together with its consolidated subsidiaries, is engaged in the provision of Internet

services to its users and advertisers. To its users, Co. provides its owned and operated online

properties and services. To its advertisers, Co. provides a range of tools and marketing services

designed to enable businesses to reach its users. To developers, Co. provides an array of Web

Services and Application Programming Interfaces, technical resources, tools, and channels to

market. Co.'s offerings to users and businesses fall into five categories: Front Doors; Search;

Communications and Communities; Media; and Connected Life.

Microsoft is engaged in developing, manufacturing, licensing, and supporting a wide range of

software products and services for many different types of computing devices. Co.'s software

products and services include operating systems for servers, personal computers, and intelligent

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devices; server applications for distributed computing environments; information worker

productivity applications; business solutions applications; high-performance computing

applications; software development tools; and video games. Co. has five segments: Client,

Server and Tools, Online Services Business, Microsoft Business Division, and Entertainment and

Devices Division.

After the successful acquisition of Yahoo!, Microsoft has increased its share on the internet

search market and become market leader in web-service subscribers. However, it is still far

behind Google in the searching advertising market. Although Google is by far the leading power

in search advertising today, internet search technology is still in its infancy and there are much

room for improvement. Microsoft shall invest on the R & D research of search technology and

the integration of search with its current products. Meanwhile, it shall also invest in the fast

growing display advertising market. As the most successful PC software company, Microsoft

key strength lies in its ability of creating software that help customers to fulfill their potential. In

the up and coming age of internet computing, Microsoft has more potential to be successful.

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2. Company and Industry Information

2.1. Google

Google primarily provides search and advertising services, which together aim to
organize and monetize the world’s information. In addition to its dominant search engine, it
offers a plethora of tools and platforms including its more popular products: Gmail, Maps and
YouTube. Most of its Web-based products are free because Google makes its money from highly
integrated online advertising through its AdWords and AdSense platforms. Google promotes the
idea that advertising should be highly targeted and relevant to users thus providing them with a
rich source of information.

Google’s mission statement is to “organize the world’s information and make it

universally accessible and useful.”

In 1996, Stanford graduate students Sergey Brin and Larry Page famously started the
search company in a Stanford dorm room. The two eventually moved the company to a Menlo
Park garage, which the company quickly outgrew. Sun Microsystems founder Andy
Bechtolsheim was the company’s first investor with other investors. In one of the most
anticipated Initial Public Offerings (IPO) Google raised $1.67 billion in August of 2004. Today,
Google has over 12,000 employees in offices throughout the world.

In 2006, Google was selected by MBA students as the ideal place to work. In 2007 and
2008 Fortune Magazine named Google the Number 1 employer in their annual 100 Best
Companies to Work For.

Eric Schmidt is the CEO and Chairman. Major Search competitors include Yahoo,
Microsoft and Ask.

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2.2. Yahoo

The two founders of Yahoo, David Filo and Jerry Yang, Ph.D. candidates in Electrical

Engineering at Stanford University started their hobby in a campus trailer in February 1994 as a

way to keep track of their personal interests on the internet. Before long, hundreds of people

were accessing their guide from well beyond the Stanford trailer. By the end of 1994, Yahoo

had already received one million hit and on March 1995 was successfully incorporated. On

April 1995, Michael Moritz of Sequoia Capital provided Yahoo with two rounds of venture

capital, raising approximately $3 million. In 1996 Yahoo was been a listed company.

The name Yahoo is an acronym for “Yet Another Hierarchical Officious Oracle,” but

Jerry and David insist they selected the name because of its definition: “rude, unsophisticated,

uncouth.” Today, Yahoo! Inc. has become the world’s largest global online network of integrated

services with more than 500 million users worldwide. According to web traffic analysis

companies, the domain yahoo.com attracted at least 1.575 billion visitors annually by 2008. The

global network of Yahoo! Websites receives 3.4 billion page views per day on average as of

October 2007. It is the second most visited website in the U.S., and in the world.

2.3. Microsoft

Microsoft Corporation, the world's largest software developer, was founded in 1975 as a

partnership between two young men, William H. Gates, 19, and Paul Allen, 21.

In July of that year, Microsoft signed a contract with MITS that allowed the hardware company

to use and market the BASIC software but Microsoft retained ownership of the computer

language.

By the end of 1976 Gates had dropped out of Harvard and had four programmers working for

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Microsoft in New Mexico. Allen left MITS in November and in March 1977 Allen and Gates

formed an official partnership. Believing that microcomputers would grow in popularity, Gates

set about convincing large corporations of the industry's future, licensing BASIC to Fortune 500

companies such as General Electric, NCR, and Citibank, among others. Microsoft licensed

BASIC for the newly introduced Apple II, Radio Shack's Tandy computer, and the Commodore

PET and TRS-80. It also began selling single copies of BASIC.

Microsoft then developed two other programming languages, FORTRAN (1977)

and COBOL (1978), for the control program of microcomputer CP/M, which was one of several

operating systems then available. Several hardware firms chose CP/M machines for their new

computers and Microsoft became the leading distributor for microcomputer languages. In 1978

Microsoft had revenues of $1.4 million and 13 employees.

On January 1, 1979, Microsoft moved its offices to Bellevue, Washington, becoming the first

microcomputer software company in the Northwest.

In 1980 the company had revenues of $7.5 million and 40 employees.

During the same year, IBM decided to enter the microcomputer market, and it hired Microsoft to

develop a computer language and operating system for its machines, which were introduced to

the public in 1981 as the IBM Personal Computer (PC). The operating system used for the IBM-

PC was called MS-DOS, short for Disk Operating System. It would become an international

industry standard, eventually replacing the CP/M operating system.

As of today, Microsoft has revenues of 58.44 billion and an estimate of 91,000

employees. The Corporation provides software products for computing devices worldwide. Its

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Client segment offers Windows product family that comprises Windows Vista; Windows XP

Professional and Home; Media Center Edition; Tablet PC Edition; and other Windows operating

systems. The company’s Server and Tools segment provides integrated server infrastructure and

middleware software that support software applications and tools built on the Windows Server

operating system. This segment offers Windows Server operating system; Microsoft SQL Server;

Microsoft Enterprise Services; product support services; Visual Studio; System Center products;

Forefront Security products; Biz Talk Server; and MSDN. Microsoft’s Online Services Business

segment provides an online advertising platform for publishers and advertisers; personal

communications services, such as email and instant messaging; and online information. It offers

Live Search; MSN; MapPoint; MSN Internet Access; MSN Premium Web Services; Windows

Live; MSN Mobile Services; AvenueA Razorfish media agency services; Atlas online tools for

advertisers; and the Drive PM ad network for publishers. The company’s Microsoft Business

Division segment provides Microsoft office product set comprising enterprise content

management, collaboration, unified communications, and business intelligence products; and

Microsoft Dynamics products for financial management, customer relationship management,

supply chain management, and analytics applications. Its Entertainment and Devices Division

segment offers the Xbox video game system, including consoles and accessories, third-party

games, games published under the Microsoft brand, and Xbox Live operations. This division

provides Zune digital music and entertainment device; PC software and online games;

Mediaroom, an Internet protocol television software; mobile and embedded device platforms;

and Surface computing platform.

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3. Financial Analysis

3.1 Liquidity Ratios

RATIO MICROSOFT YAHOO GOOGLE
Current Ratio
2008 1.45 2.78 8.76
2007 1.69 1.41 8.49
Quick Ratio
2008 1.31 1.97 8.03
2007 1.54 1.12 8.05
Working Capital
2008 13,356,000 3,040,483 17,876,092
2007 16,414,000 937,274 15,253,536
A/R Turnover
2008 4.18 3.41 9.07
2007 3.54 3.29 9.52

As you can see from above, Google is significantly more liquid healthy than Microsoft

and Yahoo. The Current and Quick Ratios show this to be true, especially in 2008. In 2007,

Yahoo's working capital is lower than it should have been considering the size of their company.

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3.2. Solvency Ratios

RATIO MICROSOFT YAHOO GOOGLE

Debt to Equity
2008 0.00 0.16 0.12
2007 0.00 0.24 0.12
Times Interest Earned
2008 N/A 2.25 N/A
2007 N/A 244.0 N/A
Free Cash Flow
2008 18,430,000,000 1,316,623,000 2,619,014
2007 15,532,000,000 7,205,412,000 1,045,139

Two ways to finance a business are debt and equity. The combination of debt and

equity that a company chooses is called its capital structure. That's because debt and equity are

the two sources of capital, and every company can choose the proportion of each that makes up

its total capital. Debt to Equity ratio compares the amount of creditors' claim to the assets of the

firms with owners' claims to the assets of the firm. Yahoo has the overall higher Debt to Equity

ratio compare to its competitors. In 2008, Microsoft has a ratio of 0 which means no liabilities’

money is used in the investment of the firm. Google has the overall low on debt to equity ratio

which shows that they have more money invested by the shareholders than money borrowed

from its creditors. Yahoo on the other hand, lowered their debt to equity ratio from .24 in 2007

to .16 in 2008. Comparing the debt to equity ratio in 2008 between Microsoft and Google is

significant which indicates that creditors have financed a greater percentage of Google business

than Microsoft. The Time Interest Ratio measures a company’s ability to make the interest

Payments on its debt. Yahoo has a higher interest in 2007 than 2008.

3.3. Profitability Ratios

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RATIO MICROSOFT YAHOO GOOGLE

Return on Asset
2008 24.3 3.32 13.3
2007 22.3 5.58 16.6
Return on Equity
2008 48.7 4.08 15.0
2007 45.2 7.06 18.5
Gross Profit
2008 80.80 58.05 60.40
2007 79.08 59.26 60.0
Earnings per Share
2008 1.87 0.31 13.46
2007 1.42 0.47 3.53

The assets of a company are comprised of both debt and equity. Both of these types of financing

are used to fund the operations of the company. The return of assets (ROA) gives us an idea of how

effectively the company is converting the money it has to invest into net income. Microsoft's ROA has

not only increase from 2007 to 2008, but is also higher than its two competitors Google and

Yahoo. These two companies have a significant decrease in their ROA, however when Yahoo

may be in trouble, Google still standing because its ROA is near the industry average of

13.5.Microsoft's assets are more efficient, profitable to generate profit compare to Google or

Yahoo. The industry average in Return on Equity (ROE) is 25.7, based on the number in the

table; Microsoft generates more profit with the money shareholders have invested, Yahoo and

Google ROE are below the industry average, which means these two companies are generating

less profit with the shareholder's money invested. The third ratio of profitability is the gross

profit ratio; the industry average for this ratio is 76.2. Google and Yahoo gross profit ratio are

below the industry average. Microsoft's high gross profit ratio indicates that the company do not

only makes a reasonable profit on sales or services but also keeps its overhead costs in control.

Overhead costs are a group of expenses that are necessary to the continued functioning of the

business, but do not directly generates profits. Compare to Microsoft and Yahoo, Google has the

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highest earning per share (EPS) The portion of Google's profit allocated to each outstanding

share of common stock is high. This may be explain by the fact that, Google has the lowest

weighted average number of shares of common stock outstanding, Microsoft has the highest net

income for 2007-2008 and also issues more outstanding stock than Google. Yahoo has the

lowest net income and issues highest number of stock during these two years. Based on these

four ratios, we can conclude that Microsoft is more profitable than Google and Yahoo. During

the current year, while Google is surviving the recession, Yahoo profit continues to decline. As

of today, Microsoft and Yahoo just announced their merge.

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3.4. Market Indicators

RATIO MICROSOFT YAHOO GOOGLE
Price Earnings
2008 16.3 3.89 13.46
2007 19.9 6.55 13.31
Dividend Yield
2008 1.15% NA NA
2007 1.80% NA NA

Market indicator ratios relate to the current market price of the company's stock to

earnings or dividends. The ratio fluctuates with market prices. Three of the companies all have

positive price earnings ratio. We can claim that Google is most profitable of the three companies

since it has highest market price and price-earnings ratio. Microsoft is the only company that

does pay common stock dividends.

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4. Current Issues

4.1. Google

Google's main competitors are Yahoo! (YHOO) and Microsoft (MSFT), which is

currently expanding into the online search and advertising business. Yahoo, founded four years

before Google, was historically the leading online search site, but in January 2009, Google made

headlines by overtaking Yahoo in unique users per month.

In June, 2008, Yahoo and Google announced a plan that would allow Yahoo to place Google ads

on its web site. This revenue sharing agreement could net Yahoo $800 million a year. The deal

was initially seen as an attempt by Yahoo to fend off Microsoft. Google and Yahoo together

control 80% of the search advertising market, and, as a result, the plan has been opposed by the

U.S. Public Interest Group on grounds of antitrust. In light of this, Google backed out of the deal

to avoid further antitrust law complications in early November 2008.

However, Google may soon face a new threat from a possible partnership between Microsoft and

Yahoo. Though Yahoo! rejected a buy-out offer from Microsoft in 2008, as of May 2009 the two

are reportedly negotiating a partnership in search, positioning the companies to attack Google in

its primary business.

Gross Rev. ($M)

2006 2007 2008

Google 10,604 16,593 21,795

year over year growth 53% 31%

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Yahoo! 6,425 6,969 7,208

year over year growth 8.4% 3.4%

Microsoft (advertising rev. only) 1,517 1,800 2,300

year over year growth 18.6% 27.7%

Because Microsoft has many sources of revenue beyond advertising, it is difficult to

compare it in more detail to Google and Yahoo!.

Relative to Yahoo!--and almost any company--Google's expenses are quite low. In 2006,

Google spent an additional $100 million in expenses to generate an incremental $4 billion in

revenue compared to Yahoo! The expense breakdown suggests different priorities for the two

companies: Google's highest cost sector is product development, at 9%, while Yahoo! allocated

20% of revenues for sales. And while Google spreads its costs evenly among the three principle

areas, Yahoo!'s expenses are clearly concentrated in sales, with development and administration

trailing far behind. Google's operating advantage is clear by looking at the operating margin for

FY 08.

2008 data ($M) Google % of Revenue Yahoo % of Revenue

Revenue 21,795 -- 7,208 --

Expenses

Research & Development 2793 13 1222 17

Selling, General & Administrative 3749 17 1610 31

Other 1094 5 2,676 9

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This week Google bought a company called O2 Technologies; a company known for

building video compression technology. Competitors and analysts are speculating that Google

will use this software to streamline YouTube and make it a profitable venture. Meanwhile critics

are looking for anyway to bash Google’s new competition of the iPhone, called myTouch which

came out on August 5. Complaints include the myTouch having keys that are too small and it

needing an adapter to charge and listen to music at the same time.

4.2. Yahoo

Microsoft and Yahoo Reach Deal on Search Partnership. Microsoft and Yahoo announced a

partnership in Internet search and advertising intended to create a stronger rival to Google. Under

the deal, Microsoft will license Yahoo’s search technologies, and Yahoo will initially receive a

lucrative 88 percent of search-generated as revenue. The pact is measured step that represents a

pragmatic division of duties between the companies instead of the blockbuster deal Microsoft

made last year, when it bid $47.5 billion to buy yahoo.

Yahoo! built its own search engine, which was the original mission of the company; the

directors decided to outsource it to a then unknown company called Google, giving Google huge

name recognition because of Yahoo!'s traffic; Yahoo! later determined search was a valuable

business itself and paid $235 million for Inktomi in 2002, and $1.6 billion for Overture, which

created paid search before Google created AdWords, in 2003; and the directors trusted Semel

and Decker's promises that "Project Panama" would close the gap between Yahoo! and Google.

Yahoo!'s search share is below 20% and the directors have now decided to shut down all internal

search development and hand the keys over to Microsoft. Bartz, the CEO of Yahoo tried to

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explain the deal to her investors on the initial call by saying that instead of receiving "boatloads

of cash," they were getting "boatloads of value" from the deal. The Street thought the opposite

and butchered Yahoo!'s stock price.

Bartz makes such a rookie mistake in managing investor expectations. Either she knew 60 days

ago that she was getting no upfront payment and made a misguided "boatload" comment, or

Microsoft really turned the screws on her in the last few weeks and stuffed lousy terms down her

throat that she had to take. Her other explanations for doing this deal sound hollow. She said,

"We didn't want to get into an arms race with Google and Microsoft in search." Then why did

your board authorize spending billions on search companies and hundreds of millions of dollars

in internal development of the much hyped and never effective "Project Panama" over the last

three years? Bartz said, "We didn't want to pay a lot of taxes on an upfront payment." Wouldn't

your shareholders like to see you paying a lot in taxes on a payment as a sign that you had

received a lot of money from Microsoft?

She said the market had changed a lot since 2008, when the full buyout offer for Yahoo! was still

on the table. Yet, since Microsoft dropped the bid for Yahoo! on May 4, 2008, the Nasdaq is

down only 17%, while the value of the deal Microsoft is paying to Yahoo! has dropped 90%

(from $47.5 billion to $4 billion to $5 billion, according to Bernstein's Jeff Lindsay), and

Yahoo!’ stock price has dropped 47%.

These mistakes aside, the real blame here lies at the feet of the Yahoo! directors who have served

on the board for the entire time that Yahoo! has failed miserably in search -- the most lucrative

non-monopolistic business that modern business has ever known. Yahoo! has had plenty of

chances to dominate this space for the last decade and has missed every one.

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4.3. Microsoft

Microsoft had a difficult fiscal year ending on June 30, 2009 with overall revenues and

operating income declining from the prior year, but the company demonstrated resiliency given

the overall economic conditions experienced during the year. What is more important, however,

is what did not take place over the past eighteen months. In early 2008, Microsoft proposed an

unsolicited takeover bid for Yahoo initially valued at slightly over $44 billion, and the bid was

subsequently raised before the deal eventually collapsed.

Microsoft shareholders have former Yahoo CEO Jerry Yang to thank for his consistent

refusals to agree to a deal at $33 per share. It appears that Microsoft has accomplished the bulk

of what Steve Ballmer was attempting to do last year without spending any cash up front.

Despite Carol Bartz’s statements earlier this year, Microsoft did not have to pay Yahoo a

“boatload of cash” in order to strike a deal. On the Yahoo side, Yahoo gets 88 percent of the

search revenue they have today. They have percent COGS against 88 percent revenue, and they

have no R&D expense and no ongoing CAPEX. It’s sort of like unbelievable.

Mr. Ballmer is too modest in terms of what the deal does for Microsoft shareholders.

Microsoft acquired the rights to license Yahoo’s core search technology for a period of ten years

and will be able to incorporate this technology into the Bing search engine where appropriate.

Bing will become the “engine” behind all searches on Yahoo sites and Microsoft will retain 12%

of search revenues generated on Yahoo’s sites. Microsoft will retain all revenues associated with

Microsoft’s sites while Yahoo will serve as the sales force for both companies’ advertising

business.While Microsoft has provided Yahoo with certain revenue guarantees for operations in

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certain countries for the first 18 months of the arrangement and will face some one time

integration costs, there are no other cash outlays required.

Of course, this arrangement will also lift Bing’s share of the market significantly and will do

so very quickly. Microsoft obviously must continue to spend on R&D for search, but this is an

expense that the company would have incurred regardless of the Yahoo arrangement. Yahoo is

relieved of such R&D spending and essentially becomes a media company. Microsoft has

accomplished what it intended to do in the $40+ billion acquisition attempt last year but without

laying out a single dollar in cash compensation to Yahoo.

While Microsoft did experience a difficult fiscal 2009, the combination of an improving

economy and a large number of new product releases should improve results for the coming

fiscal year. Microsoft’s software plus services approach appears to be more compelling. The

Client and Microsoft Business Division segments have been and will continue to be cash cows

for the foreseeable future. Server and Tools was the only segment to show increases in revenue

and operating income in fiscal 2009 and should show strong growth going forward. Microsoft’s

other business segments, including search related businesses, now have a much brighter future

than prior to the Yahoo deal.

With the risk of a very expensive acquisition of Yahoo now off the table, investors have a

much less murky scenario to deal with when it comes to valuation of Microsoft. Many value

investors have already taken positions in Microsoft at lower prices, but had to assume the risk

that Microsoft may spend a large amount of cash on acquisitions. Now that risk is largely

eliminated. Cash can instead be used to repurchase shares or perhaps pay a large one time

dividend as the company did in 2005. Under any conceivable scenario, the free cash flow

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generated by Microsoft through its businesses with large economic moats should be available for

the benefit of shareholders. This reduces uncertainty and an increase the margin of safety even at

the higher prices prevailing after the deal was announced. We anticipate that more value oriented

investors will be attracted to Microsoft shares at current prices.

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5. Conclusions and Recommendations

Compare with all three companies ratio and current issue, Microsoft would be the best

company to invest in the current time. Even Microsoft was struggling on their overall revenues

and operating income declining from last year. And the unsuccessful purchase of Yahoo!

Company. But that also bring Microsoft to the new stage of business for current time. The fail of

purchase Yahoo! created a new partnership with Yahoo Company to advertise Microsoft product

and expanding their productions in the world market. The new operating system - Windows 7

will become commercially available in October 2009. For Microsoft, the launch of Window 7

suggests strong growth in client operating systems again.  But the impact of Windows 7 will

reach far beyond Microsoft, driving revenues and growth for many of the IT companies

worldwide that sell hardware, write software, provide IT services, or serve as IT distribution

channels. Also the French ad giant will agree to buy a certain amount of search and display

inventory from Microsoft over the next five years. Even the Microsoft’s Gross revenue growing

percent is lower than Google’s, but the potential revenue it’s a lot higher than the other two

companies. Over all Microsoft would be the most potential stock to purchase in the current time.

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6. List of References and Data Sources

1. http://www.pcworld.com/businesscenter/article/169745/on2_purchase_spreads_google_even_thin
ner.html
2. http://www.foxnews.com/story/0,2933,537683,00.html

3. Google. (2009, July 18). In Wikipedia, The Free Encyclopedia. Retrieved 09:52, July 18,
2009, from http://en.wikipedia.org/w/index.php?title=Google&oldid=302748203
4. http://www.wikinvest.com/wiki/Google

5. The role of Accounting as an Information System by David Spiceland, James Sepe &

Lawrence Tomassini

6. http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx

7. Microsoft and Yahoo Now Linked up. Wall Street Times. By Steve Lohr. July 29, 2009

8. From http://www.nytimes.com/2009/07/30/technology/companies/30soft.html

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