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Microsoft Spends $6 Billion To Counter Google

Microsoft announced Friday it was spending six billion dollars to buy advertising company aQuantive, in an effort to stay in the game after Google $3.1 billion acquisition of DoubleClick. Microsoft agreed to pay $66.50 per share of the publicly traded company (ticker symbol: AQNT), a siginificant premium over Thursday’s share price of $35.87, but as soon as MS announced the deal, shares shot up to $63.79.

Microsoft paid ten times aQuantive’s estimated 2007 revenues of $616 million, and 87 times their estimated earnings per share of 77 cents. No doubt the bidding war on aQuantive hit feeding frenzy levels earlier this month, when they released quarterly earnings that blew away the Street’s expectations. This is Microsoft’s biggest acquisition ever.

Microsoft gets a lot in the all-cash deal, no doubt, including the Atlas Media Console, a set of advanced tools for advertisers and publishers, DRIVEpm, a service which matches advertisers with the right publishers, and Avenue A | Razorfish, one of the largest interactive ad agencies in the world. Still, it’s a collossal amount of money, likely the endgame in a $10 billion spending spree (Google’s $3.1 billion for DoubleClick, Yahoo’s $680 million for RIghtMedia, WPP’s $649 million for Real Media), leaving few left in the market in a giant wave of consolidation.

This is the new internet economy. So much money, so much competition. Google proved that advertising is the key to the bank, and all of a sudden, Microsoft became an advertising agency.

Microsoft has seemingly shot in the foot any antitrust claims against Google with this acquisition. By spending more than Google did, they are showing that they are not looking to litigate a win, they are going to fight this one out, and if they did try to pursue those antitrust claims, Google can point to aQuantive as proof that Microsoft has the money to compete. Microsoft has put all its chips down and has to win this one.

However, Microsoft is still arguing that Google is violating antitrust standards. The reason? Google is an advertising company, and buying another ad company is anti-competitive. Microsoft is a software company, and it bought an ad company to add to its business. That’s a good argument, but I on’t know if it’s good enough.

Kevin Kersten appears to have dug up some illegal insider trading on this deal. The day before the deal was announced, some 3,009 option contracts were bought for AQNT. For comparison, the day before that 28 contracts were bought, and averaged 96 per day for the previous 20 days. Someone knew about this deal, or more than one someones, and spent $180,540 on Thursday to make $6.74 million of Friday. That is some dirty trading, and I hope they get caught and go to jail.

Ashkan Karbasfrooshan says aQuantive is absolutely worth twice what DoubleClick was worth, because DoubleClick only provides software for advertising, while aQuantive is a diversified company with technology, services and media assets. By buying aQuantive, Microsoft is now an advertising company, while if it had bought DoubleClick, it would still be a software company. See the difference?

The Wall Street Journal points out that for $6 billion, Microsoft valued aQuantive at 45 times cash flow, and if you valued Microsoft at 45 times cash flow, it would be worth: $1 trillion. Yoiks.

May 20th, 2007 Posted by Nathan Weinberg | Advertising, Corporate, Google | one comment