Microsoft targets Google with US$6B purchase

But it was not a panic move, say analysts

Even though the US$6 billion price tag on Microsoft's acquisition of digital advertising vendor aQuantive is nearly twice what Google paid for DoubleClick last month, analysts didn't see the move as a sign of panic on Microsoft's part.

"This wasn't a panic move," says Allan Krans, an analyst with Technology Business Research. "There certainly was a sense of urgency, but not panic."

David Smith, Gartner's lead analyst on Microsoft, also refused to stick the p-word onto the purchase — the largest in Microsoft history. He put more emphasis on the contest between Google and Microsoft. "You have to take this in the context of all the other deals," Smith says. "Microsoft was beaten out by Google on DoubleClick, in the [2005] bid for a stake in AOL, and on the [2006] ad deal for MySpace. In every case, Microsoft was outbid. This time they wanted to make sure they were not outbid."

Talk of a panicked buy was fuelled in part by questions about the price. Krans blamed the last two months' online ad deals — DoubleClick to Google, the remainder of Right Media to Yahoo, 24/7 Real Media to WPP Media Group — for driving up aQuantive's value.

During a conference call, several financial analysts asked Microsoft executives to explain and defend the US$6 billion (NZ$8.2 billion), all-cash deal. "We believe it is definitely the right company to buy," said Chris Liddell, Microsoft's CFO, "and hence we're willing to pay the value we're talking about today."

That price was high, Liddell acknowledged, because Microsoft was bidding against others. "Yes, it was a competitive bidding situation," he said without naming names.

While Microsoft executives refused to couch the acquisition as a reaction to Google —there was no mention of the search and online advertising rival by name — analysts weren't so shy. "Microsoft has tried to build this internally, but without a whole lot of results. And so the gap between them and Google became larger," says Krans.

"This is clearly designed so Microsoft can compete with Google," says Smith.

Both Krans and Smith say that aQuantive is a good fit for Microsoft, and may, in fact, more than make up for the loss to Google of DoubleClick. "This is competitive with [a possible] DoubleClick deal," says Smith. "aQuantive is an important missing piece for Microsoft, and a big step in the right direction."

"This gives them the tools to compete with Google," adds Krans. "Microsoft has clearly determined that it doesn't have the time to develop a comprehensive ad platform and must make acquisitions. Google and Yahoo clearly have a head-start."

Microsoft's Liddell put it in similar, if less specific, terms as he parried questions about the high premium the company paid for aQuantive. "We will use the strength of our balance sheet when we consider it necessary to drive growth through acquisition," he said. "At times, we will make strategic bets when necessary."

Three times larger than the next-biggest Microsoft acquisition ever, the aQuantive purchase is "significant," said Liddell, but only dents the US$35 billion cash fund the company has on hand.

As big as it is, however, the deal won't solve all of Microsoft's problems in competing with Google and Yahoo. "The critical part now is driving traffic to their website. The best tools in the world won't help if there's not traffic," says Krans. "Advertisers want to see traffic."

But Microsoft has made little or no headway against Google. According to data from metrics company comScore, Microsoft's MSN accounts for 10.9% of all searches, Google, 48.3%. Yahoo is between the two with 27.5%. "No one seems to be able to close the gap on Google," Krans says.

The solution there would be some kind of arrangement with Yahoo, the No. 2 player. Combine Yahoo's share with Microsoft's and suddenly the battle for search share — and thus the ad dollars driven off the traffic — becomes 48% vs. 38%. Only last week, rumours swirled of a Microsoft-Yahoo megadeal. The chatter was just that, but the rationale behind a partnership or acquisition hasn't disappeared.

"The Yahoo deal, that would have gone a long way toward solving Microsoft's traffic problem," says Krans.

Even if that never happens, Friday's announcement has long-term implications, and not just in online advertising. "It's not just about advertising, Microsoft's future product strategy is centred on the internet," says Krans. "The company will be providing multiple lines of online services, including its core Windows and Office product sets, so more is riding on the online business than just advertising."

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