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Summary:

I’ve been trying to find a way to illustrate just how screwy Microsoft’s $6 billion bid for aQuantive is, and here it is: For $6 billion in cash, Microsoft could have hired, in a single day, 60,000 engineers and salespeople (plus managers to make sure they […]

I’ve been trying to find a way to illustrate just how screwy Microsoft’s $6 billion bid for aQuantive is, and here it is: For $6 billion in cash, Microsoft could have hired, in a single day, 60,000 engineers and salespeople (plus managers to make sure they earn their pay) – paying each one of them a $100,000 salary.

Of course, if Microsoft did that in one day everyone would think its executives had gone mad. After all, it already employs a modest 71,000 people around the world. Instead, it’s paying out $2.85 million for each of the 2,106 employees who work for aQuantive. Which, no matter how hard as people labor to rationalize this deal, is at the very least slightly more mad than that, if not good old-fashioned American bat-shit insanity.

Just as Microsoft was obsessed 10 years ago with an iron grip on the computer desktop – a vision that proved almost fatally shortsighted – it’s now obsessed with having a Bigfoot-sized imprint in the online-advertising industry.

Sure, being shut out by Google and to a lesser extent Yahoo has to be painful today, but the fact is Microsoft is seeding several markets that may well be just as important if not more important in a few years on: video games, online business transactions, health-care software and consumer-oriented robotics.

Still, Microsoft blunders on into online ads like a middle-aged ex-quarterback bent on reliving those glory days of high school. In the world of M&A, as in a post-midnight dive bar, desperation is a cheap cologne. If anyone smells it on you, they hold it against you. After Friday’s news, Microsoft is fairly doused in eau de désespoir.

Yet as always happens whenever something occurs that makes no sense whatsoever, there is no shortage of explanations: Microsoft lost Yahoo, so this is its last best option in online advertising. No wait, this allows Microsoft to get back into the courting dance with Yahoo. Or just maybe, Microsoft knows a bargain when it sees it.

The thing is, aQuantive is a respectable enough, if already overpriced, company. But its value has been erratic. Before the whole media-merger mania caught fire, aQuantive went from $11 two years ago to $29 in early 2005, down to $19 that same summer, and back up to $29 a few months on.

So aQuantive as an investment is kind of like John Travolta’s career: It really all depends on when you catch him. Are you getting the epoch-defining Saturday Night Fever or its unpalatable sequel Staying Alive? Pulp Fiction or Michael?

Just Microsoft’s luck, Travolta is about to headline the new Hairspray in drag. Microsoft wants a bride who resembles Doubleclick, snatched away by Google earlier this spring, but aQuantive has been dabbling all along in, shall we say, alternative revenue streams: “behavioral targeting businesses” and “creative development and branding,” and whatever those euphemisms, taken from aQuantive’s last 10-K, might suggest.

Microsoft has often been compared with Google unfavorably in recent years. One thing both companies shared in common was their restraint in spending hard-won capital. But with Google’s $3 billion buy of Doubleclick and now Microsoft’s buy of aQuantive that’s twice as large, I fear we are in uncharted territory of M&A-Land.

Well, territory that hasn’t been charted since the hyper-aQuisitive days of the dot-com years. But who would rationally choose to return to those silly times?

By Kevin Kelleher

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  1. Actually, this purchase makes perfect sense, Kevin…overpay for a company that wasn’t your first choice…because you “lost out” on the “opportunity” to overpay for your first choice…

    …and besides, what’s wrong with 1 + 1 = .25?

    aQuantive has no secret sauce that MS’s own folks couldn’t quickly reverse engineer…

    6 billion? Shoot; it’s not worth even 1 billion.

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  2. could it be a way of offsetting some of that profit from vista?

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  3. And today we read that Yahoo is considering a $1bn acquisition of Bebo……it may not be rational, but a return to those days seems to be occurring

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  4. anonymous_friend Sunday, May 20, 2007

    Hey Kevin,

    There’s a pretty nasty error in your headline…”Did Microsoft go lose it head over aQuantive?”

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  5. And as usual Microsoft won’t win the advertising war, simply because they still think the U.S. is the only place on Earth. Google makes money in advertising because it allows advertisers AND publishers from the world over to work with them.

    Try joining Microsoft AdCenter if you are not in the U.S. and see what happens.

    Same as the Zune, the PlaysForSure, the Urge… All U.S. centric.

    Meanwhile Google has AdSense/AdWords offices around the world…

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  6. The reason the price was so high is that aQuantive could have made an additional fortunate on their own staying public and independent. Microsoft had to compensate against the next five years of earnings and beyond, even. And there was bidding, although weirdly, we don’t know which other companies bid.

    As far as $6b = a bunch of engineers and salespeople and managers (“plus managers to make sure they earn their pay” — only a manager would ever write that sentence), you’re buying into mythical man-year. aQuantive has spent several years developing a platform and developing relationships. You can’t recreate that overnight, especially if you have the wrong mindset, which Microsoft does outside its core competencies.

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  7. Stephen Clark Sunday, May 20, 2007

    The question I want to know is why didn’t Microsoft just bust this cash out for DoubleClick? Maybe DCLK just didn’t want anything to do with MSFT.

    This may go down as one of the worst M&A values for a long time to come.

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  8. Kevin Kelleher Sunday, May 20, 2007

    Glenn: Microsoft is paying 111 times AQNT’s 2006 earnings. Let’s say aQuantive grows profit by 53% a year for the next five years. (Which is generous, since its net profit jumped 53% in 2006 but is expected to grow only 20% this year, according to the analyst consensus.)

    YEAR PROFIT PE
    2006 54 111
    2007 83 72
    2008 127 47
    2009 195 31
    2010 299 20
    2011 459 13

    In that case, the deal only begins to become a good value in 2010. Buying today on profits that won’t show up for years is in my opinion very risky. Such thinking led to hundreds of money-losing startups going public in the last bubble. Now it’s on its way back. Microsoft will do as it wants, but I definitely don’t think it’s a good thing.

    “only a manager would ever write that sentence”

    Apparently not. I was just trying to cram as many imaginary employees into that arithmetic fantasy.

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  9. Never underestimate the ego factor in M&A’s. Balmer had to be pretty ticked at watching others go out on the dance floor.

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  10. hey kevin…

    so tell me.. just how many multi million dollar operations have your built, how many sales teams have you run…

    i’m not slamming you yet, because i don’t know your background…

    so give us an overview of who you are, and what you’re done in the tec world…

    peace

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