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Still Searching

18 May 2007 By Robert Cyran

After several hopeful trips to the altar, Microsoft has finally tied the knot with a $6bn bid for aQuantive. Sadly, all the relatives in the aisles are whispering that the match looks desperate. They have a point. Microsoft is paying 85% more than the internet ad firm was worth on Thursday – and 133% more than it was worth a month ago.

In Microsoft’s defence, the ongoing land grab for internet ad firms left it little strategic choice. Google, Yahoo and ad agency WPP each snapped up competing internet advertisers in the past month. And with each purchase, the price of the few remaining properties rose. To ensure it would beat other suitors in a heated auction, Microsoft agreed to pay ten times estimated 2007 sales and 38 times ebitda.

At least the purchase looks like it will help Microsoft’s MSN business. Revenues from online ads are already $40bn industry-wide, and booming. AQuantive’s revenue rose more than 40% last year. Combine its media buying, direct marketing and search optimisation with Microsoft’s existing ad business and the deal should both increase the number of companies willing to advertise on MSN as well as improve the amount of profit Microsoft earns from each ad.

But it won’t solve Microsoft’s bigger problem. Its market share in internet search is low and falling. And efficiency doesn’t matter much without volume. Advertisers simply like large audiences, and are willing to pay far more for a multitude than a “minitude”. To compete with Google, Microsoft needs something bigger – such as a partnership or purchase of Yahoo. Anything else is just a slice from its cash pile.


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