Why Microsoft Wrote aQuantive a Big Check

Microsoft will pay $66.50 a share for aQuantive in an all-cash transaction valued at about $6 billion. That's big money, even for Microsoft—and it's a big premium, too. aQuantive stock closed at $35.87 yesterday. This morning, the stock made big, big gains—up about 78 percent and close to Microsoft's paying price—in heavy trading. It's a big deal.

The selling price is big, because Microsoft rarely pays big and almost never well above the share price.

Adam Sohn, a director in Microsoft's Online Services group, agreed that the paying price is unusual for Microsoft.

"It was a unique deal for us in the size, historically," he said. "For sure, it's bigger than anyone expected this morning."

Microsoft's willingness to pay so much suggests the company believes that it can't build up its own ad platforms fast enough. Microsoft already built MSN adCenter, and it's just not fast enough.

Sohn put it differently, saying the size of the deal demonstrates Microsoft's "commitment" to advertising, which is a "key place of growth" for the company.

The deal comes less that 24 hours after WPP agreed to buy 24/7 Real Media. Microsoft had been a contender, as well, if rumors were true.

There's something that feels rushed about the aQuantive acquisition, given the big paying price and small amount of Microsoft information. The company held a short conference call this morning ahead of the stock market opening. The seeming hurriedness raises questions about how Microsoft quickly closed the aQuantive deal following the WPP-24/7 Real Media announcement.

Show Me the Money
Microsoft's advertising urgency is apparent, and—as I blogged last month— the company is on a buying spree, as seen from ScreenTonic and Tellme acquisitions as well as acquisition rumors about DoubleClick, which Google bought, and Yahoo.

Microsoft began its push against Google and more aggressively into search and advertising in early 2003, with reasonable expectation that infrastructure would be in place in time to capture online advertising dollars as they would eventually flow online.

Four years later, ad dollars are beginning to move online, Google is turning into an advertising powerhouse and Microsoft's Online Services group is struggling to catch up. It's starting to rain money online and Microsoft's little bucket is full of holes; meanwhile, Google has hauled out a dump truck to catch all the dough.

It's no wonder that Microsoft is willing to spend—and uncharacteristically so with aQuantive—to get now what the software giant can't build fast enough for the near future. Some opportunities that have to concern Microsoft:

• Online display advertising is the fastest-growing category for ad spending, according to TNS Media Intelligence. Sohn said that advertisers would spend $40 billion online this year. Related, JupiterResearch reports that 26 percent of large advertisers plan to spend 25 percent more on search engine advertising this year.
• The online advertising opportunity is increasing for non-PC devices. For example, ABI Research forecasts that mobile advertising revenue will reach $3 billion by early 2008 and whopping $19 billion by 2011.
• Rich media is extending video from the big screen to smaller screens—and coordinated advertising campaigns with them. aQuantive is superbly positioned for video.
• Advertising is increasingly multi-channel, as advertisers coordinate campaigns across different mediums, such as television, online banners, interactive Web sites and cell phones. Microsoft has software assets for these channels, but not the advertising tools or relationships to take on Google and traditional advertising companies. The aQuantive acquisition will give Microsoft greater advertising reach and deeper advertiser relationships.
• The online and multi-channel advertising opportunity is rapidly going global, with huge opportunities, such as the 2008 Olympics in Beijing, in large and emerging markets. In many of those emerging markets, it's the cell phone and not the PC that is the everyday Internet device.

Global Reach
Microsoft is well aware of the need to broaden its reach, whether global or device.

"Now we have the ability to serve ads up across the global Internet...and we get some amazing expertise [in aQuantive]," Sohn said.

Either aQuantive or 24/7 Real Media would have brought important assets to Microsoft, the latter obviously for much less investment. Microsoft is an aQuantive client and, based on some investigating I did last year, not with 24/7 Real Media. Also, "aQuantive is a local company, which we love," Sohn said.

From aQuantive, Microsoft will gain three valuable asset companies: Atlas, Avenue A | Razorfish and DRIVEpm. Atlas offers a broad range of tools for agencies, brand marketers, direct response marketers and publishers. Atlas also offers custom research, search campaign and site optimization tools. Avenue A | Razorfish is probably best known for its interactive, rich media advertising campaigns and professional services (which account for the bulk of aQuantive revenue). I am not that familiar with DRIVEpm, which provides tools connecting publishers to advertisers.

Microsoft is going to have to move quickly to get the best from the deal, which is expected to close during second half of 2007.

The deal changes Microsoft, dramatically, particularly because of aQuantive heavy services revenue base. Microsoft is no longer just a software company. Microsoft paid big money to add new dimension to its corporate character. I've called Google a one-trick pony, because its revenue comes almost totally from advertising and contextual search. Microsoft is more multidimensional—and much more so with the addition of aQuantive. Microsoft may be far behind its big search rival, but Google might want to start looking over its shoulder.

"We're looking for deep [advertising] assets that will really change the game," Sohn said.

He may be right.

Related Posts:

• Top 10 List: Why Microsoft and Yahoo Couldn't Marry, Microsoft Watch, May 5, 2007
• Will Microsoft Yell Yahoo, Microsoft Watch, May 4, 2007
• Microsoft Vies for the Third Screen, Microsoft Watch, May 3, 2007
• The Google Quandary, Microsoft Watch, April 24, 2007
• RIM Around the Rosies, Pocket Full of Posies, Microsoft Watch, April 23, 2007
• Digital Media Bundling 2.0, Microsoft Watch, April 16, 2007
• DoubleClick and Microsoft's Thrift Culture, Microsoft Watch, April 16, 2007
• Microsoft Reorganizes Search, Microsoft Watch, March 21, 2007
• Tellme About Dial Tone 2.0, Microsoft Watch, March 15, 2007
• Tell Me What? , Microsoft Watch, March 14, 2007
• Who Shot Windows Live?, Microsoft Watch, March 8, 2007
• Wanted: Dead or Live, Microsoft Watch, March 2, 2007
• What Is Microsoft's Services Platform?, Microsoft Watch, March 1, 2007