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The hot acquisition for IT companies? An Internet advertising agency

Microsoft digs deep to pay its way into the lucrative online advertising business.

Microsoft made good on its vow to take a piece of Google Inc.'s core business, saying Friday that it will acquire aQuantive Inc., an Internet advertising agency, in an all-cash deal worth about $6 billion.

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The software maker's offer of $66.50 per share represents an 85% premium to Seattle-based aQuantive's closing share price Thursday of $35.87. By midmorning, shares of the online advertising agency, parent to Avenue A | Razorfish, soared 77% to $63.64 on the news. Microsoft shares fell 1.13%.

"Today's announcement represents the next step in the evolution of our ad network from our initial investment in MSN(R), to the broader Microsoft network including Xbox Live, Windows Live and Office Live, and now to the full capacity of the Internet," said Steve Ballmer, CEO of Microsoft, in the May 18 statement.

In a conference call following the announcement, Kevin Johnson, president of Microsoft's platforms and services division, said the acquisition is the largest in the software maker's history. The purchase is expected to close in the first half of fiscal 2008.

"It is very big," said analyst David Mitchell Smith, who covers Microsoft at Stamford, Conn.-based research firm Gartner Inc. "It's indicative of their willingness to spend some serious money in this space. They obviously got a bit tired of being beat up by Google."

The acquisition comes a month after Google outbid Microsoft to acquire DoubleClick Inc. for $3.1 billion, and on the heels of Yahoo Inc.'s decision to buy up the remaining 10% stake in Right Media Inc., its online ad broker.

Fast-growing aQuantive, founded in 1997, has about 2,600 employees and did $442 million in revenue in 2006, a 43% increase over the previous year. The company will continue to operate out of its Seattle headquarters as part of Microsoft's Online Services Business.

Money and rivalries aside, aQuantive is "a very good fit" for Microsoft, and not just because it is an Internet advertising agency, Smith said.

With aQuantive, Microsoft now has an asset on par with DoubleClick. In addition, aQuantive's Avenue A | Razorfish -- whose clients include Verizon Communications Inc., Capital One Financial Corp., Best Buy Co. and Microsoft -- gives the software maker credibility with advertising clients. And, aQuantive, known as a "leading edge" developer of new technology, is a "really good platform to promote Microsoft's Silverlight technology," Smith said.

The Microsoft effect

Microsoft, far behind search traffic powerhouses Google and Yahoo in search advertising, has a long way to go, even in making this acquisition work, Smith said.

It's indicative
of their willingness to spend some serious money in this space. They obviously got a bit tired of being beat up by Google.

David Mitchell Smith
analystGartner Inc. 

"They have to integrate it, for one," and even more critical, he added, "Soothe those advertising clients who may be worried they are dealing with an agency that is not as independent as it used to be."

The announcement also comes a few days after Google CEO Eric Schmidt sounded off at the company's annual meeting on its offerings in enterprise applications, signaled by the Mountain View, Calif.-based firm's new tagline, "Search, Ads and Apps."

"I don't read too much into that," Smith said, noting wryly that apps does come last in the list. "It's a tagline -- nothing has changed."


Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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