Digg Has Bidders?

It looks like the investment bankers at Allen & Co. may be close to earning their fees. It’s rumored that Digg’s desperate search for a buyer has found two suckers: Google and Microsoft.

According to Michael Arrington at TechCrunch, Google is prepared to offer $200-$225 million, which Digg is reportedly willing to accept. Microsoft is apparently willing to pay less but if Steve Ballmer has an episode anything is possible – a bidding war just might break out while Kevin Rose celebrates with Julia.

I find it somewhat ironic that for all the hoopla around Digg’s potential to change the business of news, the two companies who are interested in acquiring it at a hefty premium are not news companies but instead are consummate technology companies. And their interest is likely predicated solely on securing advertising inventory that reaches geeky males who don’t click on ads.

It’s interesting to note that Google and Microsoft, in their efforts to secure this advertising inventory, have been eager to enter into agreements with popular online properties under which payments are guaranteed regardless of whether advertising is sold or not so long as traffic targets are hit. As has been widely publicized, Google is losing money on many of these deals and Microsoft, which currently has these arrangements with Digg and Facebook, almost certainly is losing money on many of its deals too.

Instead of questioning the strategy, Google and Microsoft seem prepared to use their cash reserves less-than-prudently to acquire a property that reportedly derives most of its revenue from one of those guaranteed revenue deals.

Google, at least, should know better. It was suckered by Rupert Murdoch into giving News Corp. $900 million as part of an exclusive MySpace advertising deal. So the unwillingness of News Corp. to bid for Digg should have been a warning sign to the dealmakers in Mountain View who are clearly a little less shrewd than Murdoch despite their more apparent egos. Those slick investment bankers in Manhattan must be damn hard to say no to.

I personally hope that Google acquires Digg. It will essentially add Digg to my short position and that’s an offer I can’t refuse.

As a side note, I think Allen & Co. and Digg should heed the negotiating advice of Shpigler: ask for $275 million in cash – not including Kevin Rose.

Update: Jay Adelson says TechCrunch is wrong and there is no bidding war. He remains focused on “improving Digg and rolling out great features.” If Jay is telling the truth, there are two possibilities: nobody really wants Digg or Digg apparently hired Allen & Co. for no reason.