Microsoft Purchase Adds Up To A Test For Google, Yahoo

Microsoft is willing -- and able -- to pay up if it means wresting away some online ad dollars from Google and Yahoo.

The software leader stunned Wall Street Friday not by saying that it would buy online advertising firm aQuantive AQNT. Such a move was expected. The shocker was the price: $6 billion in cash.

That values the company at $66.50 a share. That's 85% more than its closing price Thursday and almost double what it traded at on April 13, when Google GOOG announced it would buy aQuantive rival DoubleClick for $3.1 billion.

But buying one of the largest online advertising firms will help Microsoft MSFT compete for a bigger share of the online ad market against such rivals as Yahoo YHOO and Google. (See related story, this page.)

Microsoft, including its MSN and Live properties, doesn't get nearly the online ad dollars of Google and Yahoo. AQuantive is one of the largest providers of online ad services, helping companies develop, place and track online ads.

With aQuantive, Microsoft can hope to capture more ad dollars, says Chris Zaharias, senior vice president of strategic initiatives for Efficient Frontier, a search marketing firm that helps advertisers place ads online.

A Gold Rush Sprint

"Microsoft has had trouble controlling the consumer, but if they have control over ad budgets then they stand the chance of being able to steer more of those ad dollars to Microsoft ad properties," he said.

Microsoft's move is the latest in the most recent Internet Gold Rush that began with Google-DoubleClick. A week later, Yahoo said it would pay $680 million for the 80% of online ad exchange Right Media that it didn't already own.

And just Thursday, ad agency WPP Group WPPGY agreed to buy 24/7 Media, another ad services company, for $650 million. Microsoft had been rumored to be mulling its own acquisitions of DoubleClick and 24/7. Shares of ValueClick VCLK, another online ad firm, rose more than 13% Friday before closing up 7.6%.

"The amazing thing about this is that it makes Google look smart," said Chris Winfield, president of 10e20, a search marketing firm.

Still, Microsoft had to act, says Shahid Kahn, a partner with IBB Consulting, a business consulting firm.

"The online advertising space is growing exponentially and will continue to grow," he said. "Microsoft cannot afford not to have a play in it."

By 2011, sales of online ads in the U.S. will reach $36.5 billion, up from $6 billion in 2002, says research firm eMarketer.

Microsoft has struggled for online ad dollars. Last year, it launched adCenter. The service sells text-based search ads, the fastest-growing type of online ad. But Microsoft lacked a way to boost online display ad revenue -- until now, said Kevin Johnson, president of the platforms and services division for Microsoft, in a conference call Friday.

Takes Us 'To A New Level'

"The online ad market is significant," he said. "This deal takes our advertising business to a new level. We are committed to earn a bigger share of that billion-dollar pie that's growing."

AQuantive will also help Microsoft cash in on video ads and ads sent to cell phones and other mobile devices, says IBB's Kahn.

"Everybody is moving toward multiplatform advertising," he said.

AQuantive sells search and display ad services and has a unit that provides Web design and related services. (IBD is a customer of that unit, Avenue A/Razorfish.)

For the first quarter, aQuantive said revenue jumped 55% from the year-earlier quarter to $142.6 million. Per-share profit, minus items, jumped 60% to 16 cents.

Analysts expect the Seattle-based company will produce revenue of more than $617 million this year, up 40% from 2006.

Microsoft executives said the company competed against others for aQuantive. And it wouldn't lose.

"Microsoft is like a frustrated home buyer in a hot market that is willing to pay whatever it takes not to get shut out again," said Greg Sterling, analyst for Sterling Market Intelligence.