Posted October 6, 2009 9:59 am by with 6 comments

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The big news this morning is a CNET report quoting Google CEO Eric Schmidt’s admission that he paid around $1 billion too much for YouTube.

Here’s an extract from Schmidt’s deposition in the ongoing Viacom suit:

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

(Viacom Attorney) Baskin: And you communicated that to the board?

Schmidt: I did.

Baskin: What methodology did you use to come up with that number?

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Schmidt: It’s just my judgment. I’ve been doing this a long time.

Baskin: So you orally communicated to your board during the course of the board meeting that you thought a more correct valuation for YouTube was $600 million to $700 million; is that what you said, sir?

Schmidt: Again, to help you along, I believe that they were worth $600 million to $700 million.

Baskin: And am I correct that you were asking your board to approve an acquisition price of $1.65 billion; correct?

Schmidt: I did.

Baskin: I’m not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Schmidt: That is correct.

Is anyone really shocked by this? Did the jaw of any Pilgrim not drop when the purchase price was originally revealed? I mean, Google paid $1.65 billion for a company that had no discernable revenue. It paid that price based Schmidt’s "judgment."

It paid based on hype.

Which leads us to Twitter. And you thought you’d get to read at least one post without mention of Twitter. 😉

You see, Twitter is the modern-day YouTube. It has all the hype and none of the revenues. If you removed hype from the math, Twitter is worth a couple hundred million. Throw hype and momentum back into the mix and Twitter is easily worth more than what Google paid for YouTube.

All Twitter needs to do is create a rumor that one of the big tech companies–Microsoft for example–is sniffing around. That’s what caused Schmidt to abandon logic:

And they had indicated to us that they would be sold, and we believed that there would be a competing offer–because of who Google was–paying much more than they were worth.

Sometimes you buy a company based on what it would be worth if your biggest rival got its hands on it. To Google, that was worth the extra $1 billion. Now we just need to see how badly someone wants to get their hands on Twitter!