Ovum comment: Microsoft offers $6bn for aQuantive

Microsoft has won a bidding war to take over online marketing agency aQuantive for $66.50 per share, an 85% premium on its closing price on Thursday, the day before the bid was made public.


aQuantive is the owner of Avenue A|Razorfish, one of the largest online advertising agencies in the world (sub-brands include DNA in London, Amnesia in Sydney, Neue Digitale in Frankfurt and eCrusade in Hong Kong and Shanghai), DRIVEpm, a group of services that buy and resell publishers' online inventory for marketing campaigns, and Atlas, which provides digital marketing technology to both advertisers and publishers.


aQuantive is based on Seattle, and is close to Microsoft's HQ in Redmond. It had revenue of $442m and an operating profit of $80m in calendar 2006, up from $308m and $61m respectively in the previous year. This is Microsoft's largest purchase ever - the $6bn dwarfs the $1.4bn paid for Great Plains in 2001.


Ovum principal analyst David Bradshaw comments:


Despite the silly spellings and punctuations, aQuantive is a very serious business as its recent revenue growth and profitability show. But still, an 80% premium on the share price and almost 14 times last year's revenue - how can it be worth this much to Microsoft‾


The answer is only if Microsoft can use this purchase to drastically improve its share of the online advertising market, which some estimates put as high as $40bn in the last year. There are two main factors that drive success in the online advertising business, the strength of your web presence and how effectively you monetize that web presence.


On the first point, Microsoft still has a mountain to climb in building its web presence to rival Google as the near-default web page for business and home users. A good example is HotMail (this is one area where Microsoft - and Yahoo! - have a significant lead over Google), where there must be potential for more revenue. In the B-to-B space, the most basic version Office Live is to be advertising driven and there has to be a lot of potential here, but only if can build a strong enough base of users.



On the second point, eQuantive's expertise in the advertising market will clearly be useful in increasing the effectiveness of the monetization. However, aQauntive cannot favour Microsoft-owned sites because this will damage the rest of its business.  Overall, then, we cannot see how aQuantive can make a huge impact.


Like Google's purchase of DoubleClick, Microsoft's purchase of aQuantive will attract regulatory attention, so there's a small but finite chance that it may not go through. On a call following the announcement, Microsoft said that it was confident that the purchase would go through. It explained that the situation was different from Google-DoubleClick, as there was no overlap between aQuantive and Microsoft, whereas it believed there to be considerable overlap between Google and DoubleClick. That raises a rather delicious prospect (from Microsoft's point of view) of Google's purchase being blocked while Microsoft's goes through.


David Bradshaw is principle analyst in Ovum's software group

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