Microsoft Agrees to Purchase AQuantive for $6 Billion

Microsoft Agrees to Purchase AQuantive for $6 Billion

By Dina Bass and Tim Mullaney

May 18 (Bloomberg) -- Microsoft Corp. agreed to buy aQuantive Inc. for about $6 billion, its biggest-ever acquisition, as the world's largest software maker seeks to catch up to Google Inc. in the online advertising market.

AQuantive shareholders will receive $66.50 a share in cash, Redmond, Washington-based Microsoft said in a statement today. The offer is 85 percent higher than aQuantive's closing price yesterday and more than 29 times the Seattle-based company's anticipated 2008 earnings before some items.

Microsoft Chief Executive Officer Steve Ballmer is hustling to keep pace as rivals make purchases to win a bigger slice of the market. Google is buying DoubleClick Inc., which competes with aQuantive in creating Web ads and measuring whether they reach the target audience, and Yahoo! Inc. is adding Right Media Inc.

``Microsoft was getting desperate,'' said Sameet Sinha, a Kaufman Brothers analyst in New York. ``With each passing deal, the scarcity value rose. AQuantive is a one-of-a-kind company.''

Shares of aQuantive jumped 77 percent to $63.60 at 12:35 p.m. in Nasdaq Stock Market trading. They had added 45 percent this year before today. Microsoft slipped 9 cents to $30.89. ValueClick Inc., a competitor to aQuantive and DoubleClick, jumped as much as 13 percent to $31.59, a record high.

`Economic Firepower'

The price, which includes outstanding options, is higher than analysts anticipated, even after Google agreed to pay $3.1 billion for DoubleClick. Analysts at Citigroup and Piper Jaffray & Co. had put aQuantive's takeover price at $39 to $42 a share.

This is the fourth Web ad acquisition since April 13, when Google announced the DoubleClick deal. Yesterday WPP Group Plc agreed to buy 24/7 Real Media Inc. Yahoo agreed last month to buy the 80 percent of Right Media that it doesn't already own.

The multiple based on earnings before interest, taxes, depreciation and amortization that Microsoft is paying is almost double what WPP will pay for 24/7, Wachovia Capital Markets analyst John Janedis said in a note. AQuantive is more profitable and has a larger share of the market than 24/7.

Microsoft beat out other bidders for aQuantive, Chief Financial Officer Chris Liddell said on a conference call today. AQuantive also probably boosted the price by posting better-than- expected results last quarter, Sinha said.

Microsoft will pay four times the price of its previous largest deal, the 2002 purchase of Navision A/S. The agreement comes after it backed away from deals such as Google's $1.65 billion acquisition of YouTube Inc. because it was too pricey.

The company, which had $28.2 billion in cash at the end of March, is willing to pay more for acquisitions that drive growth, Liddell said. ``Clearly we have the economic firepower to do more if we wish to,'' he said.

New Level

AQuantive was founded in 1997 by Chairman Nicolas Hanauer and Chief Strategy Officer Michael Galgon. Its biggest business is the online ad agency Avenue A/Razorfish, and its most profitable is the Atlas unit that sells software and services to measure and target ad campaigns.

The acquisition means a $278 million payday for Hanauer, who owned 4.18 million shares, according to filings. Galgon will get $17.7 million, based on his 266,475 shares.

Internet ad sales are growing twice as fast as the personal- computer market, where Microsoft's Windows runs most systems, and the purchase builds its position in graphical display ads, an area where the company ranks ahead of Google and behind Yahoo.

``This deal takes our ad business to a new level,'' said Kevin Johnson, president of the Microsoft unit responsible for online services, in an interview. ``We're committed to increasing our slice of the $40 billion'' worldwide Internet ad market.

Trailing Google

Microsoft's ad sales grew 23 percent last quarter, less than Google's 66 percent. Microsoft had $1.61 billion in ad sales in 2006, less than the $10.6 billion for Google, said Charles Di Bona at Sanford C. Bernstein & Co.

Google dominates the market for ads linked to search results by handling 48.3 percent of Web searches. Microsoft won 10.9 percent of U.S. searches in March, said Reston, Virginia-based ComScore Inc., which tracks Web use.

Because Microsoft trails in search ads, the company is trying to attack by convincing advertisers to focus to broader graphical ad campaigns across multiple types of media.

AQuantive, with about 2,600 employees, will help Microsoft garner more ad revenue from its MSN Web sites as well as newer areas for advertising such as the video-games, Internet Protocol television and Internet-based Office programs, Johnson said.

Targeted Ads

DoubleClick and aQuantive pull in billions of dollars in ad revenue by helping target listings to specific customers. For example, General Motors Corp. could hire aQuantive to find people browsing car sites on the Internet. Ads would then be shown to those customers when they use the Internet more broadly to read news sites, check sports scores or find the weather.

Avenue A, a buyer of search ads for clients, may help Microsoft score more revenue in that area. Owning Avenue A also puts Microsoft in the position of having one of its businesses making significant search ad purchases from Google and Yahoo.

If the deal is rejected by regulators, Microsoft may have to pay aQuantive a termination fee of $500 million, aQuantive said in a filing today. AQuantive may have to pay Microsoft $175 million if the deal is terminated under certain circumstances.

Morgan Stanley advised aQuantive and Lazard Ltd. advised Microsoft.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net ; Tim Mullaney in New York at tmullaney1@bloomberg.net

Last Updated: May 18, 2007 12:49 EDT