Noodling over how aQuantive is worth $6 billion

Is aQuantive worth twice as much as DoubleClick? Why would Microsoft pay an 85 percent premium?

Is aQuantive worth twice as much as DoubleClick? Why would Microsoft pay an 85 percent premium? Did Microsoft have a choice?

These are questions I'm noodling as I ponder the Microsoft purchase of aQuantive (see Techmeme, aQuantive history, and Microsoft Q&A).

Unfortunately, I'm not getting a lot of help with these musings. A few analysts tried to justify the deal as strategic or noted that Microsoft is too rich to care--Citigroup analyst Brent Thill noted that $6 billion is only six months of cash flow for the software giant.

Gee thanks. I think I'll stick with my Microsoft wigged out theory. Let's put this deal another way--Microsoft paid roughly $2.3 million per aQuantive employee. Let's hope that talent sticks around for Microsoft's sake.

Here is a look at what the Wall Street types are saying about justifying the premium Microsoft paid:

  • Microsoft can afford it: Thill noted that Microsoft generates $1 billion in free cash flow a month. Why sweat the $6 billion then. My take: Google could have paid even more for DoubleClick, but it didn't.
  • Microsoft had no choice: Thill also noted that "this was a competitive bid, which most likely drove the price higher than Microsoft initially intended." Sounds logical, but Google bought DoubleClick and WPP opted for 24/7 Real Media. Who could have driven the price up this much? RBC Capital Markets analyst Robert Breza has a few thoughts: Yahoo, News Corp. and potentially Comcast and Verizon were bidding for aQuantive.
  • If aQuantive means Microsoft doesn't buy Yahoo it's actually saving money. Across the board, analysts said that the aQuantive deal shelves any plans by Microsoft to acquire Yahoo--for now. The logic goes like this: A $6 billion deal and organic growth is better than a $50 billion acquisition of Yahoo.
  • The music was about to stop and Microsoft lacked a chair. Microsoft needed aQuantive and didn't want this one to get away. Yahoo, Google and Microsoft all have the same vision--an advertising dashboard. Google and Yahoo had the edge and there were only so many ad firms left. "While we would have preferred a lower price point, the premium can be justified given the scarcity of quality vendors in the digital marketing space," said J.P. Morgan analyst Adam Holt.
  • It's strategic. Breza said "we like the acquisition. While the price tag was high, we believe it's necessary for Microsoft's long-term visions of building a Software and Service model supported by advertising revenue."

Those aforementioned points are valid, but doesn't help sway the "Microsoft freaked out and paid up" theory. I'll have to side with Prudential analyst John McPeake on this one.

He noted:

"Yes, we see the importance of having an online advertising platform that can deliver advertisements optimally across all form factors, properties, and media types--and aQuantive is growing fast. That said, no, we don't see why 1) advertisers will feel that Microsoft/aQuantive is a property-neutral party and 2) Microsoft will want to send advertising dollars to competitive platforms (i.e. Yahoo, Google, AOL, et al). Although much is rightly made of the technology that aQuantive has--and the leverage it brings to Microsoft's platform, we think the synergy on the "people" or advertising agency side of the equation is less clear. As the deal is all cash, we are not sure how the human capital at aQuantive is going to be retained, and we are also somewhat skeptical as to how the two cultures are going to mesh--although the Seattle-area location should be a real benefit there."

From there, McPeake hits the analogy of the day.

Buying aQuantive suggest Microsoft is taking a different tack--buying assets that will leverage competitive properties to Microsoft. It's the equivalent of Microsoft buying a software company that runs on both Linux and Windows. This deal "just doesn't feel like it is in (Microsoft's) DNA," said McPeake.