Microsoft's Big Online Ad Buy

In its largest acquisition ever, the software giant is spending $6 billion for online marketing powerhouse aQuantive

by Jay Greene

There's rarely been a doubt that Microsoft (MSFT) intends to compete with Google (GOOG). Yet for the past few years, the software giant's efforts to take on the search giant appeared to be half-measures, as its focus always seemed diverted by other businesses. But on May 18, Microsoft made its boldest statement yet that it intends to become a dominant force in the online world. The company dug deep into its vast cash holdings and agreed to its biggest acquisition ever, a $6 billion purchase of online marketing powerhouse aQuantive (AQNT).

The deal, which the company expects to close in the second half of 2007, gives Microsoft a potent online marketing base for selling ads, placing them, and giving advertisers tools to measure ad performance. It turns Microsoft—already a force in online content with such sites as MSN—into a formidable Web power with many of the marketing pieces that advertisers look for as they embark on Internet ad campaigns.

And while Microsoft has spent lavishly in recent years to build up its online business, buying aQuantive is the clearest sign yet that Microsoft intends to create a business rivaling its PC and server software empires. "It's a big bet on advertising monetization for the long-term growth of the company," Kevin Johnson, president of Microsoft's Platforms & Services Div., said during a conference call with analysts and reporters.

Last One Standing

What's more, the deal may muzzle critics who lampooned Microsoft for failing to match Google's ambitions for Web dominance. "They've exited the 'day-late-dollar-short' club," says Sanford C. Bernstein analyst Charles Di Bona II. The deal comes just a month after Google bought Web ad giant DoubleClick for $3.1 billion, reportedly outbidding Microsoft.

There's no question that Microsoft paid dearly for aQuantive. That's because it was one of the last major online ad firms standing, after the recent sales of DoubleClick, RightMedia, 24/7 Real Media (TFSM), and Digitas (PUB) (see BusinessWeek.com 5/21/07, "Behind Those Web Mergers").

Microsoft says it beat out competitors, offering $66.50 a share in cash, an astonishing 85% premium over aQuantive's May 17 closing price. While Microsoft's shares inched down, dropping 15 cents, to $30.83, most analysts seemed willing to accept the premium it's paying for aQuantive as the price of competing with Google. "It was clear that if they didn't get this one, there wasn't going to be anything left on the table," Bernstein's Di Bona says.

Stepping Up the Deal Pace

It's also the kind of acquisition that few companies besides Microsoft could pull off. With $28.2 billion in cash as of Mar. 31, Microsoft clearly has the financial wherewithal. "This acquisition continues to demonstrate that we are willing to use the strength of our balance sheet … to aggressively accelerate our growth and support our strategic initiatives," Chief Financial Officer Chris Liddell said during the conference call.