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On April 13th Google announced a definitive agreement to buy Double Click from private equity firm Hellman & Friedman for $3.1b in cash, a price equal to approximately 20x EBITDA.  Rumors of the sale had been floating for a few weeks (Business Week ran a story on April 3rd) but the deal and the price have raised more than a few eyebrows.

Here’s a brief look at the deal and some thoughts:

DoubleClick is known largely for its Display Ad network which large advertisers rely on for brand building and general online presence.  The network which was founded in in 1995 provides ad-management for pay-for-impression (Cost Per Impression: CPM Based) internet advertisers.  Double Click has more than 1,500 clients, most of which participate in its impression-based business and many of which are major online publishers including AOL and News Corp (MySpace).

Google’s ad business, while varied, is best known for its success with search advertising and pay for performance (P4P) model that generates revenue based on viewers click-thru behavior (sometimes called Cost Per Action or CPA).  Through this system Google has a huge pool of partner sites sharing revenue and displaying the ads.

In Display Advertising, Google has generally lagged and not had tremendous comparative success.  In acquiring Double Click, Google is buying a complimentary service that enhances an area where it is weak.  It is also buying a significant client list, and some valuable, but lesser known technology.  The marriage of services and client lists should give Google a nice opportunity to bundle and sell a larger range of services to its clients.  Buying DoubleClick will help Google compete Strength to Strength with Yahoo in the Display Ad Market.

While there is a clear value proposition for the transaction, one motivation for  the deal, and the price, is likely defensive.  There’s two parts to the defensive front:

First, thought not widely known outside the industry, DoubleClick’s portfolio includes a strong affiliate P4P /Affiliate advertising platform that it acquired through a company called Performics (which retains its name inside Doubleclick.) The search and affiliate marketing tools Performics offers are considered by many in the industry to be among the best products available from a technology standpoint..  In acquiring DoubleClick, Google will successfully keep this little jewel away from competitors who would have been able to use it to potentially eat in to Google’s stronger markets.

The second defensive component regards the customer lists, and prior investments. To secure major relationships with AOL and MySpace, Google has spent approximately $2.1b (with revenue sharing etc.)  Double Click is also able to call both companies clients, but for display, not CPA advertising.  If Microsoft, or Yahoo had been able to acquire DoubleClick, and through thte transaction gained access to those two customers, they’d have had a decent chance at selling a bundled CPA and CPM ad service when the Google contracts expire.  By spending another $3b for DoubleClick, Google is able to mitigate that risk for the near term.

The biggest winner is Hellman Friedman. The private equity firm acquired Double Click in 2005.  It almost immediately sold off direct-marketing firm Abacus Direct (which Double Click acquired in 1999 for $1.76b).  Hellman Friedman then held for just 2 years and realized a return of nearly 3x its purchase price.  Not a bad return!

For all the talk about this deal, it may take some time to close. There are bound to be some antitrust concerns and a review is possible (though not likely to hold anything up more than briefly).

There’s a lot of buzz about this deal, and a lot of raised eyebrows about the valuation.  There’s also a lot of speculation brewing that other deals consolidating net advertising may also be in the works.  Time will tell on both counts.