Did Microsoft Panic With This aQuantive Buy?

Microsoft, loser of the DoubleClick sweepstakes and rumored to buy almost every online advertising company on the planet, is now on the bandwagon. The company acquired aQuantive for $6 billion.

Microsoft will pay all cash for aQuantive. The company paid a whopping $66.50 a share for the company. Aquantive closed at $35.87 on Thursday. The acquisition is the largest in Microsoft’s history.

In a statement the software giant said:

This deal expands upon the Company’s previously outlined vision to provide the advertising industry with a world class, Internet-wide advertising platform, as well as a set of tools and services that help its constituents generate the highest possible return on their advertising investments.

It better at that premium.

The acquisition makes Microsoft a bit of an advertising agency that can design ads and deliver them via its Adcenter platform. Seeing the writing on the wall WPP bought 24/7 Real Media on Thursday. Microsoft was allegedly interested in 24/7 Real Media, but found aQuantive more attractive.

CEO Steve Ballmer said aQuantive represents “the next step in the evolution of our ad network from our initial investment in MSN, to the broader Microsoft network including Xbox Live, Windows Live and Office Live, and now to the full capacity of the Internet.”

With aQuantive, Microsoft can manage campaigns, maximize inventory and design ads. AQuantive owns Avenue A/Razorfish, which is one of the largest design firms. In other words, Microsoft will be an advertising firm.

The online advertising industry has consolidated in short order. Google bought DoubleClick, Yahoo bought Right Media, WPP took out 24/7 and now Microsoft took aQuantive off the board.

On the surface, the integration of the two companies should be relatively easy. AQuantive, with 2,600 employees, is based in Seattle. And the capabilities and systems aQuantive brings to the table don’t overlap with Microsoft’s current structure that much. Microsoft plans to fold aQuantive into its online services unit.

Aquantive brings three primary systems to Microsoft: Atlas provides tools for publishers and advertisers to better monetize ad inventory; Drivepm matches campaigns and inventory; and Avenue A/Razorfish, which designs ads.

A few other observations:

* Did Microsoft panic with the aQuantive buy? If $3.1 billion was too pricey for DoubleClick how can it possibly justify a $6 billion takeover of aQuantive? I don’t care what synergies you cook up - the valuation is way rich.

* Watch the regulatory horse trading now. Kevin Johnson, president of Microsoft’s platform and services division, didn’t back down on the company’s argument that the Google and DoubleClick deal is anticompetitive on the merger conference call. Johnson argued that aQuantive is complementary to Microsoft while Google and DoubleClick overlap. In that argument, Microsoft will argue that Google and DoubleClick stifles competition while Microsoft’s aQuantive buy stimulates it.

I don’t get the argument to be honest. Online advertising is being consolidated among three giants–Google, Yahoo and Microsoft. My bet: Microsoft eventually shuts up about Google so it doesn’t raise concerns about the aQuantive deal.

Comments

[Tom B:]

I'm loving this: Vista sales abysmal; XBox still hemorhaging money, and now they buy a nothing ad company for 6 B? We may enjoy a post-MSFT future sooner than my wildest imagining, with Ballmer at the helm.

2007 May 18 11:21 AM

[jbs:]

Given MSFT's lack of an acquisition track record I don't see how anyone can be too enthusiastic about this deal - except aQuantive shareholders.

2007 May 18 11:48 AM

[Tom B:]

I recall when they bought Spyglass. That led to Internet Explorer-- another disastrous product for MSFT. While it was pretty decent for a few years, it has been just about totally neglected for roughly a decade. And it has NEVER made MSFT a dime; who pays for web browsers?

2007 May 18 03:40 PM

[Frank Li:]

As a defensive move, it made sense, even if they didn't know it at the time, because browsers now have default search options for their search windows. And Firefox uses Google search as its default.

2007 May 19 05:05 PM

[Mr. Finance:]

A latest post on the NewsVisual.com suggests that it might have paniced. Here is the excerpt from the post titled: "Microsoft Acquired aQuantive with Few Relationships"

After mapping common board, investment, non-profit, education and executive connections between Microsoft and aQuantive using IntellectSpace's Knowledge Mapping tool, too few relationships showed up that bind these two companies.

From Microsoft's side, Gregory Maffei who was its Treasurer sits on the board of Electronic Arts, where he shared a board seat with Linda J Srere -- a current board member of aQuantive. Furthermore, Charles Norski, Microsoft's current board member, also sits on Morgan Stanley's board, where it intersects with Frederic Harman, a former board and a significant shareholder of aQuantive. Lastly, David Marquardt, a board member of Microsoft, is also an investor in Atheros, a company that Price T Rowe has also an equity position, similar to aQuantive.

What is not presented on this Knowledge Map may be more telling than what is. None of the relationships involve executive positions, implying that key executives of each company did not intersect paths before. This is important, because aQuantive has a marketing culture, while Microsoft has a technology DNA, and post-acquisition cultural rifts could be a concern. Furthermore, the board of Microsoft probably worked with its financial adviser without reaching out to the target directly, therefore it may not have as intimate of an understanding of aQuantive as when the leadership of both companies are personally connected through mutual relationships.

To experience an interactive version of the Knowledge Map, following this URL using your Internet Explorer browser: fn.intellectspace.com/...

2007 May 18 02:23 PM

[Frank Li:]

It'll be really interesting to see what the value guys who own MSFT think of this. $6 bn of MSFT's cash on AQNT? Feels like desparation to me.

2007 May 19 05:06 PM