Microsoft's Big Online Ad Buy

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Microsoft's acquisition pace, particularly for online businesses, has picked up in recent months (see BusinessWeek.com 5/4/07, "Microsoft's Urge to Merge"). But this deal surpasses any other purchase Microsoft has made by a factor of four. The company bought the Danish small-business software maker Navision for $1.45 billion in 2002. Recently, Microsoft has made morsel-sized purchases of ad businesses, including video-game advertising firm Massive, and mobile-phone advertising companies ScreenTonic and MotionBridge.

Microsoft CEO Steven Ballmer was kept apprised of the negotiations but never got personally involved, according to Yusuf Mehdi, senior vice-president and chief advertising strategist at Microsoft, who closed the deal with Johnson and others. While Ballmer was engaged in Microsoft's strategizing over the deal, his involvement in the talks was largely limited to a conversation with aQuantive CEO Brian McAndrews to "express his enthusiasm," Mehdi says.

Online Ads' Coming of Age

In aQuantive, Microsoft gets a company that generated $442.2 million in sales last year, registering 43% growth. Profit grew 53%, to $54 million. Its business comprises three key brands: Atlas, which provides tools for advertisers to generate better returns on ad campaigns; DRIVEpm, a service to match ads with Web-page inventory; and Avenue A|Razorfish, one of the largest online ad agencies in the world.

The business is a far cry from Microsoft's software monopolies, particularly the ad agency business, which is about as culturally removed from software development as it gets. Some analysts question whether Microsoft will spin out pieces of Seattle-based aQuantive, but the company says it intends to keep the company intact. And with Microsoft's deep pockets and grand ambitions, McAndrews believes that aQuantive will achieve far more than it could have on its own. He says it's akin to "trading gasoline fuel with rocket fuel."

More broadly, the deal caps a spate of mergers signaling a coming of age in online advertising. "We are finally at the cusp of where traditional advertising budgets are giving way to online budgets," says Forrester Research (FORR) analyst Shar VanBoskirk. And while online advertising is a mere 10% of total ad spending, this deal and the recent raft of similar transactions suggests that the industry has turned a corner. Valuations have climbed because it's evident that companies that don't build up their online marketing prowess now will be left far behind. With the aQuantive deal, Microsoft has made sure that it's along for the ride.

Greene is BusinessWeek's Seattle bureau chief.

With Robert D. Hof in Silicon Valley and Catherine Holahan in New York