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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?

  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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  11. I might even come down to something as simple as it’s cheaper to buy it then to let the competitors have it.

    6 Billion to Microsoft is like loose change to you and I. No offense if you’re a billionaire reading this and you feel I lumped you in with us NON-billionaires.

    Look how the You Tube deal was so smart, buying stuff is easy, and building it is something all together different. And while were on the topic of Microsoft, My RANT on the new vista OS. Now I’m a reasonably smart guy when it comes to Microsoft and computers, as a Developer / Entrepreneur type I have been writing my own code running my own serves and multiple site’s since 1996 over all there doing about 3 million page views a month, not so bad for a one man show, so I know a thing or two about computers and setting them up.

    Mr. Gates, Your new Vista operating system seams so cool, I finally decided to upgrade, truth be know, I needed to run some software and it won’t work on win2000, so I figured why not give the Vista a try. I headed the warning of my friends about XP and for the most part never really noticed any deficiencies by sticking to Windows 2000, and have been running Windows 2000 happily since, well 2000. To get ready I bought 2 gig of ram, two 300GB drives so I could mirror them, all running on an IBM intellestation dual Xeon, a decent workstation overall. I got started Friday night, and now its Sunday evening at 8:00 pm. I have installed the OS “VISTA” now 9 times, around the fifth time it was going well, I installed Visual Studio 2005, it takes about an hour, so I took a nap. I woke up to blue screen hell. I spent 83 minutes on the phone with a girl from China living in Alberta Canada; here accent was so thick she calls it Windows Wista not Vista. We had to call it quits after she had to go down the path “Call the MFG of your hardware” yeah, IBM, is going to help me install Wista. Case number one zero three five eight two seven six five nine. About forty eight hours later and half a grand in the hole my first impressions of Wista are circa 1995, Microsoft should change its slogan to “Microsoft, what DID you want to do this weekend”

    You just spent 6 billion on an ad company and only 1 billion developing a new OS. Something’s is wrong with that. If you want to make it up to me, send me a new box with a functional Windows Vista on it.

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  12. Microsoft is losing focus. They should have stuck to building their software products. Google is making them look like fools. This is the most pathetic decline in corporate history unfolding. Why?

    Greed. Gotta have this, gotta have that. Need to dominate this and that. Google is going to eat their lunch until they don’t have any supper.

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  13. funny . a lot of folks said the same thing when MS bought ,Hotmail for $400 Million . and if you look back now the price seems totally valid . without hotmail ,MS would not have stand a chance in Internet .

    we can write whatever we wish to amuse ourself but the fact is Bill is more financially prudent than you and Me .He didn’t inherited MS , he build it and he defeated a lot of rival like IBM,NS,SUN,APPLE,Novell etc . he knows his bet . he is good at poker :)

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  14. “In that case, the deal only begins to become a good value in 2010.” Right, and I said “five years or even beyond.” So I appreciate the analysis, but 2010 is just three years from now, and I’m pointing out that Microsoft had to both offer a significant incentive over staying private and counter bidding. So the valuation makes sense in that context as aQuantive could have rejected all lower bids.

    I’m just saying this from the aQuantive side of the street. I still don’t see why Microsoft paid quite that much, despite the excellent software and agency results delivered by the firm.

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  15. I can only imagine the integration challenges with the rest of Microsoft. Given Microsoft’s unique culture and aQuantive’s diverse business lines, it’s going to be quite the challenge to absorb aQuantive.

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  16. Kevin,

    The facts you cite about Microsoft’s own employment levels of 71,000 for a company with a market value of 294 billion dollars (4 million per employee) undermines your argument that there is somehow a one to one correlation between the absolute number of employees in a company and its value.

    Whether Microsoft’s purchase of aQuantive ultimately represents a wise decision or an act of desperation will be determined based on whether Microsoft is able to gain first mover advantage in certain critical categories of the growing on-line advertising market. Certainly the jury is out on that question.

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  17. How can you say that MS’s focus on Computers was short sightedness? They are still milking money from the monopoly they have built up over the years. MS has always been a follower.. even in the PC days.. I think it is only a matter of time before it catches up with the big G.

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  18. Well, hiring 60k engineers is a process that can cost SO MUCH money that you also have to put into equation. Then you have the process of getting them oriented, trained; you have to get them infrastructure, etc. etc. – the cost can be pretty major. Then you have to keep them busy developing further projects. Salary is one of the least expense. I’d buy a solution, rather than go crazy with 60k new staff ;)

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  19. This is even worse than it looks at first glance. Avenue A/Razorfish and the other agencies in the deal account for well over 50% of the revenue in the latest 10-k. There’s a huge conflict of interest here. You can’t be the world’s largest internet publisher and the largest agency at the same time. They’ll have to spin it off at a much lower valuation (unless someone out there is even more irrationally exuberant than MSFT).

    That means that the degree they’ve overpaid for the other assets here is even more pronounced.

    Maybe you should just focus on shipping Halo 4, Steve. Leave the internet to the professionals.

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  20. Benefit: Microsoft now has a new – and global – sales network to help sell its online ad solutions to clients. aQuantive companies do this day in / day out and Microsoft is piggy backing this sales operation. Could there be preferential deals for clients who sign up to MS ad solutions as part of a marketing campaign? Go on to Microsoft’s site to see the array of ad opportunities that can be sold in. Xbox Live is a case in point. Who else can offer access to this network of gamers as part of a one stop shop ad / marketing solution. I’ll admit it – I’m excited by it…

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  21. What value do you think the market places on Microsoft employees? $4.2 million? ($300 billion divided by 71,000 employees?)

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  22. I think folks are getting all lathered up about the price (not unfairly so – it’s expensive by any reasonable metric as I note in my blog: http://www.sawickipedia.com/blog/2007/05/18/holy-valuation-bat-man-microsoft-buys-aquantive/). However, having been involved in a fair amount of m&a activity in the online space the last ten years, there’s a rule of thumb which I talk about today that a deal if it works out, will always look cheap.(http://www.sawickipedia.com/blog/2007/05/21/microsoft-aquantive-followup/)

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  23. To see the next m&a transaction ahead of time.

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  24. kevin — kudos to you for an awesome post and for pulling such a great bunch of comments…..best read I’ve had all day

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  25. This seems to me to be less a case of chasing Google’s acquisition of Doubleclick and more a case of chasing AOL’s acquisition of Advertising.com. More at http://lsvp.wordpress.com/2007/05/22/2c-on-why-portals-buy-ad-networks/

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  26. “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.”

    Not a chance. Even with simplifying assumptions, this comparison is stupefying. Hiring 60,000 people outright — where do they work? You have to build offices. You can’t hire them all in one place, or their collective salaries will drive col through the roof and overwhelm local infrastructure. And those are just the easy factors to consider. Nevermind what they’d actually do, how you’d lead them, what the vision is …

    Frankly, I think your “comparison” is the ultimate example of the “nine women having a baby in one month” mentality that often gets bandied about in these M&A discussions.

    Microsoft’s alternative, in my view, was to spend $2 billion (conservatively) and have a 25% chance (optimistically) at penetrating the market, versus spending $6 billion and having a 100% chance. By that calculus, the deal seems much more reasonable.

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  27. I think it makes a lot of sense.

    But then, I happened to have bought a couple of hundred shares of aQuantive last Monday.

    ;)

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  28. What AQNT offers MS or Yahoo or anyone with loads of traffic is deep wizardry for slicing and dicing their ad inventory to package it up at much higher rates. And contrary to this post, it is not something Microsoft or anyone can easily and certainly not quickly duplicate. That is why companies that have this magic (Doubleclick, AQNT) go for billions. Bulk undifferentiated ad inventory that might go fo $0.50-$1 CPMs can now be repackaged with deeper insights about who visits those pages and resold for $5, 6, or even $10+ CPMs and that is just hugely valuable if you have lots of inventory like Microsoft or Yahoo. What MSFT offers aqnt (beyond mega $) is a much better chance to get their widgetry distributed really widely so that they can continue to be the magicians at repackaging ad inventory for top dollar. AQNT alone would face a tougher and tougher job of doing that in the face of a world consolidating around the big guys.

    On the valuation the real question is not the multiple of AQNT revenue and earnings that they paid, but what is the impact on value and uplift of Microsoft’s ad inventory that AQNT will give them. If AQNT can take $500M of Microsoft ad inventory and double it’s value in the first year (and I have no idea if they can do this — it is a what-if) that would represent tremendous value, and of course value that is not at all reflected in examining AQNT’s P&L as an independent company.

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  29. For all those dissing Kevin, just read what mini-msft has to say about the aquantive deal. 6 billion. Absurd.

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  30. In regards to Kevin’s response to Glenn about not becoming a good value until 2010, you forgot to also factor in growth of the online advertising market. Online advertising is somewhere around an $18 billion market now, but by 2010, it is projected to grow to over $40 billion. Besides, think about how much aQuantive will be able to grow and advertise with an extra $6 billion to work with and household name like Microsoft to back it up. With a guaranteed chance of acquiring a good-sized fraction of this market by acquiring aQuantive, Microsoft will make a decent return from its investment and possibly be able to make up for its failure to properly develop its new operating systems.

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