Online Ad Bubble: aQuantive Deal Makes No Financial Sense For Microsoft

Not to be outdone by Google (GOOG) in overpaying for online advertising companies, Microsoft (MSFT) will pay $6 billion for ad company aQuantive (AQNT), corporate parent of Avenue A / Razorfish (link to the Wall Street Journal, article, subscription required). To put that in perspective, aQuantive's revenue last year was $442 million, so Microsoft is paying almost 14 times revenue for the company. Compare that with the Doubleclick acquisition by Google, where Google paid only 10 times its $300 million revenue. Microsoft's own Don Dodge even called a $2 billion acquisition of Doubleclick out of line.

If anyone needed proof that the online ad business is in the middle of a bubble of valuations, this is an excellent data point. Blackfriars' survey of US businesses says that senior executives in US companies plan to spend less on marketing and advertising this year than in any quarter in the last three. With that as a backdrop, it will take Microsoft more than a decade to recoup the $6 billion it is investing in aQuantive, if ever. And with Microsoft already tapping deferred revenue assets to deliver numbers that Wall Street likes, throwing billions more at opportunities like this isn't going to help its stagnant stock price.

Said another way, while this deal may have strategic value to someone at Microsoft (clearly someone forgot to send the memo to Don Dodge), it makes no financial sense. And when we start seeing merger and acquisition deals that make no financial sense, that's when we know we're in a speculative bubble. And like all speculative bubbles, investors shouldn't be surprised when it pops.

Full disclosure: the author has no positions in the companies mentioned in this article.

Comments

[Alan Williams:]

Given Microsoft's track record of running acquisitions, big and small, into the ground and having the said acquisitions virtually disappearing in 3 or 4 years, chances of anything but minimal return on this $6 billion investment are very low.

2007 May 20 11:52 AM

[Tom B:]

Web TV acquisition-- MSFT spent a half-billion (but dollars were worth more). result--no profit, no product.

Spyglass acquisition-- lead to Internet Explorer. IE actually WAS a decent browser for about 2 years-- but it never made MSFT a dime.

Bungie acquisition-- Halo is supposed to be a great game. The Xbox is supposed to be semi-ok-- but MSFT is bleeding money on the XBox platform; thus, again, their corporate stupidity shines through.

Connectix acquisition-- gave then Virtual PC. A product now obsolete.

Great Plains software acquisition-- gave them a relatively uninteresting accounting product.

Yep, they have a pretty godawful record. Perhaps their worst acquistion was Steve Ballmer, and that occurred a long ways back.

2007 May 21 12:26 AM

[Everyday Fi...:]

I could kick myself. I actually called this the Thursday of the deal and recommended buying July 40s for .40 each. Now they're worth 24 each. a 60 fold return on investment. I will post on the one that got away and why I didn't pull the trigger. This deal was highly telegraphed though, I should have known better. Anyway, more takeover targets listed at my site. Happy hunting!
everydayfinance.blogsp...

2007 May 20 04:10 PM

[Echo To All:]

i do not think a general statement of the 'online ad business being in a bubble' is correct. (at least I do not think Google's valuation merits such a statement.) I think the bubble is concentrated to the niche players capable of being aquired.

but the 2007 projected marketing spending is interesting, and maybe why google is trading at a discount.

2007 May 20 04:34 PM

[Sr. Pessimist:]

It disturbs me how the giants persist without actually developing anything. Who gives them the right to just come and trade a governed currency for some one else's hard work? Microsoft is not rightfully entitled to anything more than what they themselves can develop, just like anybody else. But still they depend on money solving their problems for them. Even an acquisition must be done right, as pointed out above.

It's as if Microsoft isn't even a software company. They're just an illegal trust buying yet more things. Either inept or stupid, they can't connect that innovation drives the web market. They're competing with growing script kiddies who live, eat, and breathe code. Anything they buy, regardless of how many billions, can just be exceeded with a GNU GPL project. This $6 billion buy could go down the drain overnight.

2007 May 21 04:37 AM