Microsoft to buy digital marketing company for $6B

aQuantive to help boost company's Net advertising business

Microsoft Corp. said it plans to acquire aQuantive Inc., a digital marketing services agency, for about $6 billion in order to boost its Internet advertising business.

Microsoft said aQuantive's 2,600 employees will be incorporated into its online services business, dedicated to growing advertising on the company's MSN portal, its Windows Live online services, the Xbox Live gaming platform and Office Live services.

The planned acquisition comes just a month after Google Inc. offered $3.1 billion for DoubleClick Inc., a network of advertisers and Web publishers, to boost its capabilities in rich-media advertising such as banner, graphical and video ads.

While Microsoft lost out in the DoubleClick bidding war, aQuantive represents a significant acquisition for Microsoft, albeit a smaller one than the company's rumored interest in a buyout of Yahoo Inc. The aQuantive purchase is still the largest deal in Microsoft's history, and represents 2% of the company's market capitalization.

Microsoft Chief Financial Officer Chris Liddell acknowledged on a conference call today that, like the DoubleClick scenario, Microsoft was in a competitive bidding war for aQuantive. This is one reason the company is paying a significantly higher price per share for the company than its current market value.

Subject to shareholder and regulatory approval, the deal, which values aQuantive at $66.50 per share, is expected to close in the first half of Microsoft's fiscal 2008. Microsoft is offering an 85.4% premium on aQuantive's stock, which closed yesterday at $35.87.

Liddell defended the price Microsoft is willing to pay for aQuantive because of the deal's strategic significance.

"We believe it is exactly the right company to buy," he said. "We're willing to use the terms of our balance sheet to drive growth through acquisition and at times will make strategic bets when necessary."

Most agree Microsoft had to make a drastic move to catch up to Google in online advertising or risk losing the opportunity to compete at all in that market. But one Microsoft user said even the aQuantive deal may not be enough.

"This could easily be too little, too late," said Andrew Brust, chief of new technology at IT consulting firm Twentysix New York, a Microsoft partner.

However, Kevin Johnson, president of Microsoft's platforms and services division, said the deal will give the software company a much-needed shot in the arm. "This deal takes our advertising business to a new level," he said during the conference call.

AQuantive will bring new digital advertising software and services for Microsoft to support other services such as on-demand video and IP television. AQuantive's Avenue A Razorfish service puts together packages of online advertising for its clients. The company also runs Atlas, a business that offers software and services for digital ad placement. AQuantive has a third service, DRIVEpm, that helps advertisers and publishers manage campaigns and ad inventory.

For the first time, Microsoft will be able to offer display advertising on any Web site, Johnson said. Another key asset of the acquisition is that it adds scale to Microsoft's ability to reach a range of advertising channels, such as ad agencies, publishers and independent advertisers, he said.

The deal also will help the company monetize all of its new and existing Web-based services, such as Windows Live, Office Live and Windows Live Search, through advertising, Johnson said. This has been the strategy for Microsoft since it revamped its online services plan in November 2005, but so far, the company has been limited in its ability to deliver.

Despite his optimism about how the acquisition will improve Microsoft's position against Google, Johnson said the company still disapproves of Google's planned purchase of DoubleClick. Civil rights groups have asked regulators to block the acquisition because they said the deal will be anticompetitive and also raises privacy concerns.

"Consider on one hand, aQuantive is in three lines of businesses. Microsoft today is in none of those businesses," Johnson said. "Google and DoubleClick have overlapping businesses ... that will give that combined entity 80% or more market share. We believe and continue to believe that transaction will reduce competition."

Johnson would not comment on the specifics of how Microsoft will bring together aQuantive's offerings with its online properties and adCenter advertising platform, saying the companies are putting teams in place now to work on the integration plan.

Liddell said he expects that the deal will not have much of an impact on operating expenses in fiscal 2008, though Microsoft will begin to see revenue from the acquisition during that time frame.

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