Update: Microsoft to buy aQuantive for $6 billion

Microsoft acquires a digital marketing services agency in order to grow its Internet advertising business

Microsoft plans to acquire aQuantive, a digital marketing services agency, for around $6 billion in order to grow its Internet advertising business, it announced Friday.

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 offered $3.1 billion for DoubleClick, 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. AQuantive will still be the largest deal in the company's history, and represents two percent of Microsoft's market capitalization.

Microsoft Chief Financial Officer Chris Liddell acknowledged on a conference call Friday that like the DoubleClick scenario, Microsoft was also in a competitive bidding war for the aQuantive deal. 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 a massive 85.4 percent premium on aQuantive's stock, which closed Thursday 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, new technology for IT consulting firm Twentysix New York, a Microsoft partner.

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

AQuantive will bring new digital advertising software and services for Microsoft to support other services such as on-demand video and IP (Internet Protocol) television. AQuantive's Avenue A Razorfish service puts together packages of online advertising for its clients. The company has 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 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 plan 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 all 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," he said. "Google and DoubleClick have overlapping businesses ... that will give that combined entity 80 percent 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 existing 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 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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