Microsoft to buy aQuantive for $6 billion after Google offered $3.1 billion for DoubleClick

Microsoft plans to acquire aQuantive, a digital marketing services agency, for around $6 billion in order to grow its Internet advertising business, it announced Friday.

Microsoft said aQuantive's 2,600 employees will be incorporated into its online services business, dedicated to growing advertising on the company's MSN portal, its Windows Live online services, the
Xbox Live gaming platform and Office Live services.
The planned acquisition comes just a month after Google offered $3.1 billion for DoubleClick, a network of advertisers and Web publishers, to boost its capabilities in rich media advertising such as banner, graphical and video ads.
While Microsoft lost out in the DoubleClick bidding war, aQuantive represents a significant acquisition for Microsoft, albeit a smaller one than the company's rumored interest in a buyout of Yahoo. AQuantive will still be the largest deal in the company's history, and represents two percent of Microsoft's market capitalization.
Microsoft Chief Financial Officer Chris Liddell acknowledged on a conference call Friday that like the DoubleClick scenario, Microsoft was also in a competitive bidding war for the aQuantive deal. This is one reason the company is paying a significantly higher price per share for the company than its current market value.
Subject to shareholder and regulatory approval, the deal, which values aQuantive at $66.50 per share, is expected to close in the first half of Microsoft's fiscal 2008. Microsoft is offering a massive 85.4 percent premium on aQuantive's stock, which closed Thursday at $35.87.
Liddell defended the price Microsoft is willing to pay for aQuantive because of the deal's strategic significance.
"We believe it is exactly the right company to buy," he said. "We're willing to use the terms of our balance sheet to drive growth through acquisition and at times will make strategic bets when necessary."
Most agree Microsoft had to make a drastic move to catch up to Google in online advertising or risk losing the opportunity to compete at all in that market. But one Microsoft user said even the aQuantive deal may not be enough.
"This could easily be too little, too late," said Andrew Brust, chief, new technology for IT consulting firm Twentysix New York, a Microsoft partner.
However, Kevin Johnson, president of Microsoft's platforms and services division, thinks the deal will give the software giant the much-needed shot in the arm. "This deal takes our advertising business to a new level," he said on Friday's conference call.
AQuantive will bring new digital advertising software and services for Microsoft to support other services such as on-demand video and IP (Internet Protocol) television. AQuantive's Avenue A Razorfish service puts together packages of online advertising for its clients. The company has also runs Atlas, a business that offers software and services for digital ad placement. AQuantive has a third service, DRIVEpm, that helps advertisers and publishers manage campaigns and ad inventory.
For the first time, Microsoft will be able to offer display advertising on any Web site, Johnson said. Another key asset of the acquisition is it adds scale to Microsoft's ability to reach a range of advertising channels, such as ad agencies, publishers and independent advertisers, he said.
The deal also will help the company monetize all of its new and existing Web-based services, such as Windows Live, Office Live and Windows Live Search, through advertising, Johnson said. This has been the plan for Microsoft since it revamped its online services plan in November 2005, but so far the company has been limited in its ability to deliver.
Despite all his optimism about how the acquisition will improve Microsoft's position against Google, Johnson said the company still disapproves of Google's planned purchase of DoubleClick. Civil-rights groups have asked regulators to block the acquisition because they said the deal will be anticompetitive and also raises privacy concerns.
"Consider on one hand: aQuantive is in three lines of businesses. Microsoft today is in none of those businesses," he said. "Google and DoubleClick have overlapping businesses ... that will give that combined entity 80 percent or more market share. We believe and continue to believe that transaction will reduce competition."
Johnson would not comment on the specifics of how Microsoft will bring together aQuantive's existing offerings with its online properties and adCenter advertising platform, saying the companies are putting teams in place now to work on the integration plan.
Liddell said he expects the deal will not have much of an impact on operating expenses in fiscal 2008, though Microsoft will begin to see revenue from the acquisition during that time frame.

Yahoo and MSN fall even further behind Google

ANOTHER month, another string of victories for Google, the world’s emerging internet superpower. On Tuesday April 17th, in the latest sign that Google has the upper hand over all its rivals, Yahoo! disappointed analysts with its first quarter results: profits were down by 11% to $142m. Google’s share of web searches keeps going up. It now executes more than 64% of all searches, according to Hitwise, a market-research firm. Yahoo!, its main rival, appears stuck at about 21%, and distantly third, Microsoft’s MSN continues its decline, to below 10%. With both the most popular search engine and the most efficient system for placing sponsored text advertisements, Google dominates the lucrative and fast-growing market for so-called “paid search” advertising (where advertisers pay only for actual mouse clicks).
Google’s grip is tightening elsewhere. Last week it said it would pay $3.1 billion for DoubleClick, the web’s largest broker between online publishers and advertisers for “branded” or “display” advertisements (paying for views rather than clicks). This segment is growing as fast as paid search. Google also struck a deal with Clear Channel Communications, America’s largest radio broadcaster, to sell airtime on 675 radio stations to advertisers in Google’s network. Earlier this month Google said it will place advertisements with EchoStar, a satellite-TV operator, and also with traditional newspapers. Google is thus launching an all-out attack on the entire advertising market.
In the process, Google is bashing Yahoo!. It, along with Microsoft and Time Warner, owner of AOL, had also bid for DoubleClick and failed. Terry Semel, Yahoo!’s boss, has suffered a string of strategic defeats, having been outbid by Google for a stake in AOL and for YouTube, the leader in online video. Moreover, Mr Semel had recently been trying to defend against Google in display advertising, while hoping to attack it in paid search. Traditionally, Yahoo! has placed text advertisements on its search pages based only on how much an advertiser bids for a given search term (or “keyword”, such as “mountain bikes”); Google takes other variables into consideration and so makes its advertisements more relevant to web searchers, thus earning more revenues.
In February Yahoo! launched a new advertising algorithm, called Panama, that is meant to close this technical gap, but there is scepticism that it can make much difference. Advertising systems do not ride on their algorithm alone but also on their network of advertisers and publishers. Google’s network, in paid search, is now so large that advertisers cannot afford to abandon it. So Panama may only prevent Yahoo! from falling further behind.
Mr Semel’s other defence is to use the growing fear of Google among “old-media” companies to engineer various alliances to contain the enemy. In March Yahoo!, along with MSN and AOL, signed on to a new partnership with NBC and Rupert Murdoch’s News Corporation, which intend to form a joint venture in online video to counter Google’s YouTube. Last week Yahoo! expanded an advertising alliance with Viacom, which is currently suing YouTube. And this week, Yahoo! announced a deal with a consortium of newspaper publishers to run their content on Yahoo!’s websites, and to place advertisements on the sites of the newspapers.
For MSN the picture is even bleaker. Online advertising is still a minuscule part of overall revenues but is still crucial to Microsoft’s growth strategy. So far Microsoft is failing. Sarah Friar, an analyst at Goldman Sachs, estimates that Google will make operating profits of more than $5 billion this year, which will grow by 36% for the next three years and Yahoo! will make $3 billion and grow by 20%. Microsoft’s online businesses will make losses of $2 billion, and more in the next two years. Microsoft’s nightmare scenario, however, is that Google will at some point disrupt its core business of selling shrink-wrapped software. Google recently said that it would add presentation software to the word processing and spreadsheets that it already offers free online.
Google may face a downside to its expansion, as Henry Blodget of Cherry Hill Research, points out. Placing advertisements on its own search pages gives Google profit margins of about 60%; placing advertisements on other web pages, such as blogs, yields margins between 10% and 20%. As Google expands into new segments, such as broadcast, its margins will probably keep declining, especially as new media partners are likely to give Google only “left-over” inventory. So Google is far from becoming a monopolist but it is, for the moment, far ahead of its peers.