Four out of five people online in June saw a DoubleClick ad and more than four out of five saw an Atlas ad. When you consider the total ad coverage associated with these two behemoths you essentially have coverage over the entire Internet Browser Population. Considering there we’re just over 174 million people online in the US in June, that’s a lot of eyeballs. If we start talking page views then we’re talking over 20 billion ads served to people in the US by Atlas and DoubleClick in June alone.

aQuantive was recently acquired by Microsoft (MSFT) in a $6B deal, making it one of the better performing stocks in my portfolio. Please note that for every hit like this, there are misses. In fact, I’ve been working on a post on my biggest trading/investing mistakes and there’s so much there that it’s taking a while.

I was not going to post the lot size, then decided to do so anyway as I want to share a few lessons (under the graph):

Per share, MSFT agreed to pay $66.50 (an 85% premium) even though as recently as May 30th, the stock was only at $63.75.

On Thursday, the day before the announcement that sent AQNT shares skyrocketing 76% overnight, I put up a specific post highlighting this as a top pick for a takeover by Microsoft (MSFT) specifically. The very next day, Microsoft announced they would be buying AQNT for over $60 a share when the stock had been in the mid 30s. Although I underestimated the return on the options as a 1000% return, which ended up being a 6,000% return (the buyout premium was much more than the 30% I anticipated, gotta love the leverage of options), the call was as timely and accurate as ever, and from a practical standpoint, as much so as will ever be again in my lifetime. Essentially, this would have been in the same realm as when George Soros made a fortune betting against the British pound overnight (except mine was more lucky luck than calculated manipulation of a foreign currency).

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.

May 18: Microsoft (MSFT) announces it will pay $6b in cash for aQuantive (AQNT), parent to digital agencies Avenue A, Razorfish, Atlas and DRIVEpm. That price constitutes a huge premium relative to $442m in ’06 revenue (net income was $54m)

May 17: British advertising giant WPP Group (WPPGY), which is known for its offline ad services, announced it would acquire 24/7 Real Media (TFSM) for $649m. (the price represented a premium of approximately 17x EBITDA)

April 30: Yahoo (YHOO) acquired the 80% of internet ad auction exchange Right Media it didn’t own for approximately $680m.

April 13: Google (GOOG) acquires DoubleClick for $3.1b (price represents approximately 20x EBITDA)

Much commentary referring to these deals has focused on the seemingly extreme valuations. Quite a bit has also suggested each new acquisition was an answer to the one that came before; a suggestion as if each acquisition had been a part of a game of competitive one-upsmanship between Yahoo, Google, and Microsoft.

I’ve been trying to find a way to illustrate just how screwy Microsoft’s $6 billion bid for aQuantive is, and here it is: For $6 billion in cash, Microsoft could have hired, in a single day, 60,000 engineers and salespeople (plus managers to make sure they earn their pay) - paying each one of them a $100,000 salary.

This nature of this deal and the discussion around it encouraged me to look deeper into the numbers and the motivations for this monster buyout. Microsoft certainly did not get aQuantive on the cheap – paying close to 80 times the Internet advertising agency's trailing 12 months levered free cash flow.

Not only did they go with aQuantive, but they paid an astronomical price. Shares of AQNT were trading at $36 yesterday and that quote was pricing in a lot of buyout speculation already. Somehow they got Ballmer and Company to offer more than $66 per share in cash, an 85% premium. Such a bid puts Mister Softy on the hook for a cash outlay of $6 billion. In return, it gets a business at 104 times trailing earnings, 86 times current year earnings, and a whopping 67 times 2008 earnings.

Is it a good move, given the price tag? I can't see how it could be. Based on 2006 sales figures, AQNT will represent less than 1% of Microsoft's revenue. This deal can hardly move the needle for them, in my view. Sure, it will add some expertise in a field that the company is struggling with, but given that this deal is just being done to keep up with acquisitions already announced by competitors, Microsoft is just keeping pace with rivals, not gaining on them.

Microsoft (MSFT) announced plans to acquire Internet advertising company aQuantive (AQNT) in a deal valued at about $6 billion, or $66.50 a share, a significant premium. Founded in 1997, aQuantive is the parent company of Avenue A/Razorfish, Atlas Media Console and Drive PM.

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.

Sick of forever being outbid and then having to mumble about "expensive" amid the Google (GOOG)-Yahoo (YHOO) celebrations, Microsoft (MSFT) made a preemptive offer on this one. At 2% of Microsoft's market value, the acquisition is still a tuck-in, but it's the biggest one in Microsoft's history. aQuantive won't solve all of Microsoft's web problems, but it will solve some of them. Most importantly, it will mean that Microsoft's web business must--at least temporarily--be taken seriously again.

What has surprised people, however, with Friday's Microsoft (MSFT) deal for aQuantive is the towering premium Microsoft was willing to pay for the company. A $6-billion deal and an 86% premium to Thursday's close is Murdoch-ian, the kind of "shut up and sing" (or at least shut up and sell ads) price that says let's stop talking and just get this over with.

But it's more than that too. It's also a sign of newfound aggression from Microsoft, an example of it saying that it can play the price premium game, locking out competitors like Google and Yahoo by playing bid-'em-up.

Microsoft (MSFT), aQuantive (AQNT), Yahoo (YHOO): Cramer calls MSFT's bid to buy AQNT at $6 billion a "game changer," and he doesn't see any reason why it wouldn't also buy YHOO for $50 billion. The bid may usher in the beginning of a "land grab against Google." While Cramer wouldn't buy a down company solely because of a potential takeover, he notes YHOO has great traffic and thinks the stock could reach $34 immediately if CEO Terry Semel takes a "permanent vacation."

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.

Microsoft announced Friday it would acquire web advertising firm aQuantive Inc. for about $66.50/share -- an 85% premium to Thursday's close of $35.87. AQNT shares are trading at $65 in the pre-market. The move, which will cost Microsoft about $6 billion, follows WPP Group's acquisition of web advertiser 24/7 Real Media on Thursday for $650 million; it had been rumored Microsoft might attempt to buy 24/7. Other recent consolidation in the sector includes Google buying DoubleClick for $3.1 billion and Yahoo taking the remaining stake in Right Media for $680 million, both in April. In a post on Seeking Alpha Thursday, contributor Jason Jones looked at aQuantive's potential buyout value. His conclusion: "AQNT is worth $44 if you use the 24/7 Real Media take-out multiple (23x), $60 if you use the DoubleClick multiple (33x), and $75 if you use the Right Media multiple (10x EV/Revs)." Microsoft said in its press release the acquisition would help it provide a "world class, internet-wide advertising platform." Its units include the Atlas media toolset, DRIVEpm that matches ad inventory with availability, and its Avenue A/Razorfish ad agency. Microsoft expects to close the deal in the second half of 2007. Analysts note the deal may serve as proof Microsoft has no intention of joining forces with Yahoo, as has been rumored recently. Microsoft said the deal would not have a significant impact on its previously provided financial outlook. Its shares are down 0.4% to $30.85 in pre-market trading. Shares of ValueClick, the only remaining soloist in web advertising, are up 7.25% to $29.90.

A list of recent M&A in the sector is below. But first, here are the single folks still waiting to be scooped up:

TRANSCRIPT SPONSOR

aQuantive, Inc. (AQNT)
Q1 2007 Earnings Call
May 08, 2007 8:30 am ET

For the quarter, aQuantive reported revenue of $142.6 million and EPS of 16 cents a share, crushing the Street estimates of $122.79 million and 9 cents. For the second quarter, the company sees revenue of $148 million to $153 million, with net income of $13 million to $14.5 million; the Street had revenue at $138 million.

For the full year, aQuantive sees revenue of $595 million to $615 million, beating the Street consensus of $570.73 million.