Microsoft announced this morning it was making its largest-ever acquisition, a $6 billion purchase of online advertising company aQuantive Inc. The move is a forceful, much needed bid to gain some solid footing in an industry dominated by rival Google.
According to Microsoft, online advertising represents a $40 billion opportunity that will grow 20% per year until 2010. Thus far, Microsoft has struggled to keep pace. But the company says buying aQuantive will change the game. “We expect to get a bigger piece of the pie going forward,” said Kevin Johnson, president of Microsoft’s platform products and services division, in a conference call. Microsoft in recent months has created a new search and advertising group on the heels of frustration with continued market share losses to Google.
Microsoft’s repeatedly been a rumored would-be suitor in a recently boiling market of online advertising acquisitions, including in WPP Group’s purchase of 24/7 Real Media earlier this week and Google’s $3.1 billion purchase of DoubleClick last month. Additionally, Yahoo bought out the rest of Right Media, a company in which it already had a stake, in a $680 million deal at the end of April.
But Microsoft finally got its catch in a competitive bidding process for aQuantive. It was one that ended up with Microsoft paying a whopping 85% premium over aQuantive’s closing price yesterday of $35.87 per share, a measure of Microsoft’s urgency to succeed in online advertising. With observers questioning the amount Google paid for DoubleClick last month, they are already following suit here. “The premium does seem to be rather rich,” Credit Suisse analyst Jayson Maynard said on the conference call.
While the deal is uncharacteristically large for Microsoft, it still only amounts to 2% of Microsoft’s total market capitalization. It confirms the company’s statements in recent months that it isn’t afraid of large deals. Witness recent rumors the company might even buy Yahoo. “We’re willing to buy companies that make a difference regardless of their size,” Microsoft CFO Chris Lidell said on the call. Microsoft made a much smaller advertising buy earlier this month for mobile ad company ScreenTonic.
aQuantive is a proven advertising force, with sales last year of $442.2 million. Its subsidiaries include: Atlas, with its Digital Marketing Suite of products to deliver, manage, and optimize ad delivery; Drive Performance Media, which buys, categorizes, and then re-sells online ads targeted to user behavior and demographics; and online ad agency Avenue A/Razorfish, which counts major companies like Coca-Cola, Ford Motor Company, Nike, and Visa among its long list of clients.
A company of about 2,600 employees, aQuantive will continue to operate from its home in Seattle, only a short drive away from Microsoft’s headquarters in nearby Redmond. Being located so close to one another, aQuantive and Microsoft are already on familiar terms. For example, Microsoft is an Avenue A/Razorfish customer, and Avenue A/Razorfish has gotten early access to Microsoft technologies like its Silverlight online multimedia platform. “This is not a relationship that is newly formed,” Johnson said on the call.
Microsoft plans to supplement aQuantive’s technologies and properties with its own existing advertising platforms like adCenter. According to Johnson, none of the two company’s technologies have much overlap. Specifics of integration are still up in the air, but Microsoft plans to bring its products and aQuantive’s together into a broad set of products that constitute a highly scalable “end-to-end solution” that covers a spectrum from targeting to production to management and delivery of ads. Microsoft will also use aQuantive to help support a growing line of online applications and services with advertising.
The acquisition is not without challenges. Firstly, Avenue A/Razorfish, aQuantive’s largest property, is an ad agency. That’s not a business Microsoft knows a lot about, but there haven’t been plans voiced to sell it off. Meanwhile, Microsoft is in the midst of a major push to bring a slate of online services to market under the Live banner, so aQuantive could either give Live a great new avenue to make money or be an untimely burden on Microsoft’s online services group