Add to del.icio.us     Digg this

May 18, 2007

Today, Microsoft announces that it will be acquiring online ad agency aQuantive for $6 billion. The transaction will be done all in cash. Microsoft is acquiring the ad firm at a very high premium when compared to what aQuantive's stock was trading yesterday.

Microsoft is paying $66.50 a share for aQuantive, representing an 85 percent premium over Thursday's closing price.

This sudden acquisition is an example of Microsoft's desperate attempts to catch up in the rapidly growing PPC ad segment, and is just the latest deal in this industry, following recent moves by rivals Google and Yahoo.

During a conference call with analysts today, Microsoft Chief Operating Officer Kevin Johnson said "this acquisition takes our advertising business to the next level. This will allow us to take a larger share of that $40 billion market segment that is still growing everyday."

Microsoft said this deal is important, since many online services that the company is offering, from software to video games, become more and more dependent upon online advertising revenue.

Gartner analyst David Smith agrees the deal is a necessary one for Microsoft, given the changing economics of its business. But he said there are still questions about the acquisition beyond its costs.

Smith added "this is a step in the right direction, but they're still very significantly behind Google. Integration is also going to be an interesting challenge for them. Microsoft has never done an acquisition this big in the past."

Executives at Microsoft said they were in a bidding war for aQuantive, although, as is usually the case in such deals, they didn't identify the other bidder or bidders.

Chief Financial Officer Chris Liddell said "we're still happy with the price we paid. We believe it's exactly the right company to acquire so we're willing to pay the premium we are paying today. We will use the strength of our balance sheet when we think it's necessary to drive growth going forward."

Overall, Smith added that Microsoft has been rather a conservative buyer in the past, even walking away from deals if it felt were too expensive.

He also said "you can count four or five deals where they chose not to spend money and got outbid. That probably played a big role in them deciding to pay what it took."

Chris Liddell said the deal doesn't signal that Microsoft will turn more to acquisitions to keep growing in the future, although he added "we certainly have the economic fire power if we decide to do more."

At the end of its most recent quarter, Microsoft had a little over $28 billion in cash and short-term investments on its balance sheet.

On May 4, there were some reports that Microsoft was interested in acquiring rival Yahoo, in a deal that might be worth about $50 billion, dwarfing the acquisition of aQuantive.

However, Yahoo was apparently reluctant to pursue those talks. Gartner's Smith said he doesn't believe the aQuantive deal signals either a new buying spree by Microsoft or the end of its interest in some kind of deal with Yahoo.

Add to del.icio.us     Digg this

    This article was featured on Business 5.0.

Source: Yahoo press release