Microsoft to Buy Online Ad Company

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Microsoft to Buy Online Ad Company

Grafik: Chasing Ad Dollars

Published: May 19, 2007

Microsoft said today that it would buy the online advertising company aQuantive for $66.50 a share, or approximately $6 billion. It is Microsoft’s largest acquisition ever, and the latest in a flurry of deals for online advertising firms by big Internet and media companies.

The all-cash acquisition represents an 85 percent premium over aQuantive’s closing price of $35.87 yesterday, underscoring just how critical Microsoft believes the deal is to its troubled efforts to become a major force in the fast-growing online advertising business.

“It puts us in the game, if you like,” Chris Dobson, head of global advertising sales at Microsoft, said in a telephone interview. “If you ever had any doubt that Microsoft was going to be big in the online advertising space, this should make it clear that it will.”

The deal comes on the heels of Google’s recent agreement to buy DoubleClick for $3.1 billion, as well as the acquisitions of RightMedia by Yahoo and of 24/7 RealMedia by the advertising giant WPP Group. Microsoft, which had tried unsuccessfully to buy DoubleClick, faced competition for aQuantive, but was determined not to be outbid this time, executives said in a conference call.

Based in Seattle, aQuantive has several major businesses. Its Atlas unit competes with DoubleClick and is used by advertisers and publishers to deliver ads online in real time when users visit a Web page. The company also owns AvenueA/Razorfish, a leading interactive ad agency, and DRIVEpm, an advertising network.

Microsoft has struggled to compete in the online advertising market, particularly against Google, which dominates the field.

Until now, Microsoft has sold ads on its MSN portal and used a technology called AdCenter to sell ads linked to Internet search — a booming businesses, and the cornerstone of Google’s power. But Microsoft’s share of the search business has steadily declined, limiting the effectiveness of AdCenter.

With aQuantive, Microsoft will be able to help sell and broker ads on sites across the Web, a business that is seen as increasingly important as advertising continues to shift online. The acquisitions of DoubleClick and RightMedia by Google and Yahoo were also intended to bolster those companies’ efforts to sell and broker ads on a myriad of Web sites.

Microsoft has asked regulators to scrutinize the Google-DoubleClick deal, which it said would reduce competition. But Brad Smith, Microsoft’s senior vice president and general counsel, said Microsoft’s acquisition of aQuantive would promote competition.

Forecasters at ZenithOptimedia, a media buying agency, predict that Internet ad spending will total $31 billion globally this year, a 28 percent increase from last year. In terms of market share, the Internet has already passed outdoor advertising, and will pass radio next year, ZenithOptimedia says.

“We’re going to see people taking tens of millions of dollars out of television advertising and putting it into online, and that’s what all these guys are betting on,” said Shar VanBoskirk, an analyst at Forrester Research.

The boom in Internet advertising is also reshaping the advertising pipeline, with online media owners like Google, Yahoo and Microsoft’s MSN increasingly moving into areas that used to be dominated by advertising companies like Omnicom Group, WPP and Publicis Groupe.

In the offline world, there has generally been a clear distinction between media outlets and advertising agencies, which create the ads and buy time or space to run them. On the Internet, that line has been blurred, with portals like Google increasingly pushing into “upstream” areas like media planning and buying.

“We’ve suddenly got two different sides that are competing in the same area, in the advertising companies and the media owners,” Ms. VanBoskirk said.

There are signs of friction as online media owners like Google, with their deep pockets, expand. Google’s agreement to buy DoubleClick was criticized by Martin Sorrell, chief executive of WPP Group, who said it could trouble marketers.

“It raises issues about whether we are prepared to give Google data that’s very valuable,” he said last month as WPP gave a quarterly financial update. “Clients will be concerned over the access Google may have to information that is owned by them.”

While companies like 24/7 and DoubleClick focus primarily on distributing Internet advertising to online media owners, aQuantive gives Microsoft some broader capabilities. In addition to the Atlas ad serving platform, it also creates ads and plans media strategy, among other things, moving Microsoft into areas in which Google has not yet staked a claim.

“Today’s announcement represents the next step in the evolution of our ad network from our initial investment in MSN, to the broader Microsoft network including Xbox Live, Windows Live and Office Live, and now to the full capacity of the Internet,” Microsoft’s chief executive, Steven A. Ballmer, said in a statement.

Microsoft said that the deal would close during its 2008 fiscal year, which begins July 1, and that the merger is likely to require antitrust review.

Microsoft’s shares opened slightly lower after the deal was announced, and closed at $30.83, down 15 cents.

The dealmaking frenzy in the online advertising business has caused a rapid escalation in the valuations of acquisition targets. In January, Publicis Groupe, the Paris-based advertising company, acquired Digitas, a Boston-based agency that specializes in Internet and medical communications, for $1.3 billion, or about 2.7 times sales.

In the latest deal, Microsoft is paying around 10 times estimated revenue for aQuantive. “There will be a limit to the escalation in price,” said Maurice Lévy, chief executive of Publicis, in a recent telephone conversation. “The current market has a kind of bubble.”

Mr. Dobson of Microsoft said the price that his company was paying was justified because of the potential for growth in the online advertising market. “Yes, it is high — it is a premium,” he said. “It’s much more about the medium to long term than the current size of the market.”

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