Mi­crosoft to buy on­line ad com­pany

It snaps up AQuan­tive for $6 bil­lion as it tries to keep pace with ri­vals.

Los Angeles Times - - Business - By Alana Se­muels

Mi­crosoft Corp. said Fri­day that it would buy on­line ad­ver­tis­ing firm AQuan­tive Inc. for about $6 bil­lion in cash, pay­ing a hefty pre­mium to try to catch up with ma­jor ad deals by com­peti­tors over the last six weeks.

In its largest ac­qui­si­tion ever, Mi­crosoft snapped up the last of the big, in­de­pen­dently owned con­cerns that fo­cus on de­liv­er­ing tar­geted Web ads.

The deal es­ca­lated the bat­tle for on­line ad­ver­tis­ers and au­di­ences as Mi­crosoft, Google Inc. and other In­ter­net gi­ants con­tinue to siphon ad dol­lars from tra­di­tional me­dia.

Mi­crosoft has faced crit­i­cism for mov­ing too slowly to keep pace with Google, but it agreed to pony up nearly twice AQuan­tive’s mar­ket value to ac­quire the Seat­tle-based dig­i­tal mar­keter.

“Th­ese deals say that on­line ad­ver­tis­ing is a real mar­ket and is grow­ing fast,” A.G. Ed­wards & Sons Inc. an­a­lyst Denise Gar­cia said.

AQuan­tive is best known for its on­line ad­ver­tis­ing agency, Av­enue A/Ra­zor­fish, which gen­er­ated more than 60% of its par­ent’s $442 mil­lion of rev­enue in 2006. But an­a­lysts said the prize for Mi­crosoft was AQuan­tive’s At­las di­vi­sion, which helps com­pa­nies place ads on their sites that are suited to the time of day and viewer. It also de­liv­ers video ads.

Mi­crosoft’s on­line com­peti­tors boast sim­i­lar tech­nol­ogy. Last month Google agreed to buy Dou­bleClick Inc. for $3.1 bil­lion, and Ya­hoo Inc. said it would pay $649 mil­lion for the 80% of Right Me­dia Inc. it didn’t al­ready own. Time Warner Inc.’s AOL cred­its much of its resur­gence in on­line ad­ver­tis­ing rev­enue to Ad­ver­tis­ing.com, the ad-serv­ing busi­ness it bought in 2004.

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Mi­crosoft, based in Red­mond, Wash., of­fered $66.50 a share, far above the $35.87 AQuan­tive fetched when mar­kets closed Thurs­day.

“The take-out price rep­re­sents an as­ton­ish­ing 85% pre­mium over yes­ter­day’s clos­ing price, re­flect­ing the scarcity value of qual­ity In­ter­net as­sets and [Mi­crosoft’s] lack of trac­tion in on­line ad­ver­tis­ing to date,” Youssef H. Squali, an an­a­lyst with Jef­feries & Co., wrote in a re­search note to clients Fri­day.

AQuan­tive shares soared 78%, or $27.92, to $63.79 af­ter the an­nounce­ment. Mi­crosoft shares fell 15 cents to $30.83.

Richard Fe­tyko, an an­a­lyst for Mer­ri­man Curhan Ford & Co., said AQuan­tive had sur­passed Dou­bleClick to be­came the largest ad-serv­ing sys­tem avail­able to ad­ver­tis­ers. “It’s a very gen­er­ous price,” Fe­tyko said. “But they are buy­ing the jewel of the on­line ad sec­tor.”

Mi­crosoft’s an­nounce­ment came at a busy time for In­ter­net ad­ver­tis­ing com­pa­nies.

WPP, the world’s sec­ond-big­gest ad­ver­tis­ing com­pany, said Thurs­day that it was buy­ing 24/7 Real Me­dia Inc. to beef up its on­line ca­pa­bil­i­ties, six months af­ter ri­val Publi­cis Groupe bought on­line mar­ket­ing com­pany Dig­i­tas Inc. And on Wed­nes­day, AOL bought a con­trol­ling in­ter­est in Ger­man firm AdTech.

“The ad­ver­tis­ing in­dus­try is evolv­ing and grow­ing at an in­cred­i­ble pace, mov­ing in­creas­ingly to­ward on­line and [In­ter­net]-served plat­forms,” Mi­crosoft Chief Ex­ec­u­tive Steve Ballmer said in a state­ment. This “dra­mat­i­cally in­creases the im­por­tance of soft­ware for this in­dus­try.”

On­line ad­ver­tis­ing is on track to gen­er­ate about $20 bil­lion in rev­enue this year. Much of that comes from search-en­gine ads, which place so-called spon­sored links to web­sites next to search re­sults.

But as the in­ter­est in on­line ad­ver­tis­ing grows, ma­jor In­ter­net com­pa­nies are fo­cus­ing more on de­liv­er­ing ads to other web­sites, said Mark King­don, CEO of Or­ganic Inc., a dig­i­tal ad agency owned by Om­ni­com Group.

“Ev­ery­body looked ahead and saw that search was a rel­a­tively small piece of the on­line ad po­ten­tial,” he said. “Now they’re try­ing to po­si­tion them­selves for the next new wave.”

As com­pa­nies such as Mi­crosoft be­come one-stop shops for ad­ver­tis­ers, they face an in­her­ent con­flict of in­ter­est. In Mi­crosoft’s case, Av­enue A/Ra­zor­fish buys ads on AOL, Ya­hoo and many other web­sites — some of which com­pete di­rectly for ad­ver­tis­ing rev­enue with Mi­crosoft. And Mi­crosoft’s In­ter­net units do busi­ness with many dig­i­tal ad agen­cies that com­pete with Av­enue A/Ra­zor­fish.

David Haller­man, an an­a­lyst with re­search firm eMar­keter Inc., said the sit­u­a­tion could spur com­pe­ti­tion within Mi­crosoft that ul­ti­mately would ben­e­fit the com­pany. Fe­tyko, on the other hand, said the in­her­ent con­flict might com­pel Mi­crosoft to spin off or sell the agency unit and keep the ad-de­liv­ery tech­nol­ogy.

An­a­lysts said the com­pe­ti­tion among web­sites for brand ad­ver­tis­ers would pro­vide more ad for­mats and lower prices, broad­en­ing the ap­peal of In­ter­net mar­ket­ing.

ValueClick Inc., a West­lake Vil­lage on­line ad firm that had been con­sid­ered a prime buy­out tar­get, gave po­ten­tial ac­quir­ers some pause Fri­day when it said that the Fed­eral Trade Com­mis­sion was ask­ing about some of its Web mar­ket­ing prac­tices.

The in­ves­ti­ga­tion con­cerns how ValueClick steered surfers to web­sites that prom­ise free gifts. ValueClick said it was co­op­er­at­ing fully.

Jor­dan Rohan, an an­a­lyst with RBC Cap­i­tal Mar­kets, down­graded his rat­ing on ValueClick’s stock to his firm’s equiv­a­lent of sell from hold. He cited the FTC in­quiry and the AQuan­tive ac­qui­si­tion, say­ing Mi­crosoft was less likely to buy ValueClick af­ter snap­ping up the big­ger dig­i­tal agency.

Yet in­vestors sent ValueClick shares up $2.12, or 8%, to $30 on Fri­day, bet­ting that the ac­qui­si­tion spree wasn’t over yet.

alana.se­muels@la­times.com

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