Why aQuantive Was Worth Twice As Much As DoubleClick

In 2003, I began to buy shares in DoubleClick (DCLK), ValueClick (VCLK), aQuantive (AQNT), Fastclick, etc. [Fastclick was bought by VCLK, eventually]. If it was in online ads, I was long.

Over the years, I sold most of these shares because the stocks rose from high single digits to $20 or so. The one company I bought back every single time was AQNT. Last week, AQNT founders hit the jackpot when Microsoft (MSFT_ paid $66.50 a share or an 85% premium.

Matt Ingram asked is AQNT worth 2 times DCLK? Others simply asked who is AQNT . Kevin Kelleher thought MSFT is “bat-shit insane.”

Here's why I think AQNT is worth twice as much as DCLK:

For one, I don’t think DCLK was worth $3.1B, but if DCLK went for $3.1B, then I can see AQNT being worth 2 x that. Yes, crazy talk. Welcome back to the crazy times.

DCLK is a software company whose upside is limited to a) the number of contracts it has secured and b) the number of impressions it serves. Indeed, on Google’s (GOOG) grid, these numbers - particularly b) - can grow quite a bit. But when a lot of people said Google just hit a home run in online advertising by buying DCLK, they were wrong because saying DCLK is an online advertising play is akin to saying MSFT is strong with ad agencies because ad agencies use PowerPoint in their client pitches.

DCLK sold all of its media assets to L90/MaxOnline when ad rates were low and no one really paid CPM rates, and got into software only.

AQNT, on the other hand, has technology, services and media assets. It is definitely the most diversified online advertising firm. MSFT’s own Don Dodge lists AQNT’s assets, which include:

Atlas, which provides a set of advanced tools for both advertisers and publishers. The Atlas Media Console is an industry-leading toolset providing agencies and advertisers with capabilities to maximize ROI. The Atlas Publisher platform enables publishers to maximize monetization opportunities for their content.

DRIVEpm, which provides services to publishers and advertisers that match advertiser campaigns with publisher inventory enabling all parties to maximize ROI.

Avenue A ¦ Razorfish which is one of the largest interactive ad agencies in the world, providing advertisers with industry-leading digital marketing consultation, media planning and buying, and creative services that help advertisers use the online channel to build meaningful, profitable relationships with their customers.

MSFT is now an advertising company. Well, it’s an advertising and software company. The $6B price was the cost of entry. If it would have bought DCLK, it would have been an even bigger software company. Microsoft would have been a second or third tier ad network, but AQNT is a top tier advertising company.

MSFT can now build world-class sites (AQNT bought Razorfish).

MSFT can now plan, buy and create ads (AQNT owns Avenue A’s agency, which is the agency for hundreds of F500 advertisers).

MSFT can now do so much more with email marketing.

MSFT’s adCenter just became relevant, since Atlas DMT is DCLK on steroids and miles ahead of Dart for Advertisers.

That’s just online, on MSN.com, it can now offer advertisers a bit more than AOL (TWX) can, and a lot more than Yahoo! can. In other words, this deal will help MSN catch up to Yahoo! (YHOO)

Admittedly, it’s now an execution and integration risk management case…

This is all actually very accretive to MSFT despite the $6B sale. Frankly, paying cash was smart because cash does not command much of a multiple, but this deal will command quite a multiple. And AQNT’s business - in 2006 AQNT reported net income of $53.9 million on revenue of $442 million - means that there’s enough there to start moving MSFT’s P/E AND P/S from a software multiple to an ad multiple. I know, MSFT makes $40B in revenue a year, so that’s only 1%, but MSN.com accounts for 1% and this just might be a case where 1+1= a lot more than 2.

Comments

[brianbaumgart:]

this is most accurate analysis i've seen, since the news broke. i'm an industry veteran who has worked with and competed against these companies since 1999. most reviews have been way off, so nice job on hitting the nail on the head.

2007 May 24 12:52 PM

[cameronm:]

Some of this is right and some is deeply flawed. Microsoft is a software company not a website consultancy. The Ex-razorfish business is low margin and not the kind of services business Microsoft will have any interest in. It was a bold move by aqnt (then Avenue A) to buy them and it worked out (though it depressed margins for a long time) because it gave aqnt needed scale to compete with Doubleclick.

Likewise why in th hell does MSFT want to be in the agency business competing with other agencies around the world. Oh great a new piece of the value chain that will hate MSFT... Do you think the guys that work for Ballmer want to walk into his office explaining why they lost the XYZ account to wpp or whomever???? What the fuck do they care? I bet they sell this piece off and if they are smart they can forge a new alliance in doing this.

So what's the jewel? What AQNT offers MS or Yahoo or anyone with loads of traffic is deep wizardry for slicing and dicing their ad inventory to package it up at much higher rates. Bulk undifferentiated ad inventory that might go fo $0.50 CPMs can now be repackaged with deeper insights about who visits those pages and resold for $5, 6, or even $10+ CPMs and that is just hugely valuable if you have lots of inventory like Microsoft or Yahoo. What MSFT offers aqnt beyond mega $ is a much better chance to get their widgetry distrbuted really widely so that they can continue to by the magicians at repackaging ad inventory for top dollar. AQNT alone would face a tougher and tougher job of doing that in the face of a world consolidating around the big guys. Microsoft bought unique valuable ad technology not a boatload of HTML programmers or agancy hacks.

2007 May 24 03:56 PM

[cameronm:]

On the valuation the real question is not the multiple of AQNT revenue and earnings that they paid, but what is the impact on value and uplift of Microsoft's ad inventory that AQNT will give them. If AQNT can take $500M of Microsoft ad inventory and double it's value in the first year (and I have no idea if they can do this -- it is a what-if) that would represent tremedous value, and of course value that is not at all reflected in examining AQNT's P&L as an independent company.

That said, of course it is an insanely expensive deal by normal metrics. Why? Two reasons, I bet Google was bidding if only to drive up Microsoft's cost and I bet there was seething anger and downright blood-lust over losing the Doubleclick deal.

2007 May 24 04:10 PM

[Sr. Pessimist:]

My observation is that the primary means a large corporation has to compete with is capital force. I haven't seen Microsoft innovate much. XBox is just a competitor to Sony and Nintendo. Zune is just a competitor to IPod. I don't know what Live is, if it's not an over-hyped competitor for other large portals. They're simply competing to buy.

I've seen them suffer against Linux. OpenOffice.org, FireFox, Evolution. This stuff just grinds them away and will not stop. I know their weakness. All the big guys have a similar weakness.

2007 May 25 04:05 AM