Microsoft is showing how seriously it is taking its rivalry with Google and Yahoo by saying it will pay $6bn, the staggering 85% premium driven up by competing bids, for online advertising company aQuantive.
If the deal closes as planned in the second half of this year, it will be Microsoft’s largest acquisition in its 32-year history, over four times the size of its second-largest deal.
We will use the strength of our balance sheet when we consider it necessary to drive growth, CFO Chris Liddell told analysts. At times we are going to make strategic bets where we believe they are necessary.
Its balance sheet had $42bn of current assets on it as of March 31 2007, $28bn of which was in liquid cash and short-term investments.
The ad firm had sales of $442.2m last year, a 43% increase on 2005. It made $53m in net profit in 2006, which will barely cause a ripple when added to Microsoft’s already monstrous cash machine.
Indeed, Liddell said that the deal will not significantly impact Microsoft’s operating profit or earnings per share in its fiscal 2008, which begins in July.
Microsoft’s online services group is in fact larger by revenue than aQuantive as a whole. OSG saw $623m in revenue, up 11%, in the company’s last-reported quarter. That’s a mixture of advertising, which grew 23%, and internet access, which dropped 11%.
As may be expected when such a huge premium is being offered, the bidding for aQuantive was competitive. Liddell confirmed as much, though he naturally did not reveal which companies Microsoft was bidding against.
The deal will see Microsoft pay $66.50 in cash for each aQuantive share. Those shares closed at $35.87 the day before the announcement and leapt 78% on Friday. Shareholder approval of such a juicy bid would appear to be a mere formality.
The acquisition will of course been seen in the light of Yahoo’s $680m consolidation of control over Right Media, the $650m acquisition of 24/7 Media by WPP Group and, in particular, Google’s recent $3bn purchase of DoubleClick.
By the recent estimate of Don Dodge, director of business development for Microsoft’s Emerging Business Team, Google was ripped off. He wrote on his blog last month that the suggestion that Microsoft may pay 20 times revenue for DoubleClick was way out of line. Google ultimately paid 30 times revenue by that math.
The Microsoft-aQuantive deal is worth about 13 times aQuantive’s 2006 annual revenue, and about 10 times what analysts on average were predicting for 2007 revenue.
Such a large deal will of course attract the attention of competition regulators around the world. It will be subject to Hart-Scott-Rodino approval in the US, but Microsoft general counsel Brad Smith said he does not expect the acquisition to draw European Commission interest.