US experts question Microsoft's aQuantive buy

The amount represents an 85 per cent premium on aQuantive's closing price on 17 May, and makes the purchase Microsoft's most costly ever, easily dwarfing the US$1.4 billion (A$1.7 billion) it paid for Great Plains in 2001.

AQuantive is based in Seattle, close to Microsoft's Redmond headquarters. The ad agency had revenues of US$442 million (A$538 million) and an operating profit of US$80 million (A$97.5 million) in calendar 2006, up from US$308 million (A$375.5 million) and US$61 million (A$74 million) respectively in the previous year.

"AQuantive is a very serious business as its recent revenue growth and profitability show," said Ovum principle analyst, David Bradshaw.

"But, at an 80 per cent premium on the share price and almost 14 times last year's revenue, how can it be worth this much to Microsoft?"

Bradshaw added that the deal would make financial sense only if Microsoft can use the purchase to "drastically improve" its share of the online advertising market.

"There are two main factors that drive success in the online advertising business: the strength of your web presence; and how effectively you monetise that web presence," he said.

"AQuantive's expertise in the advertising market will clearly be useful in increasing the effectiveness of the monetisation.

"However, aQuantive cannot favour Microsoft-owned sites because this will damage the rest of its business. Overall, we cannot see how aQuantive can make a huge impact."

Bradshaw maintained that Microsoft still has a "mountain to climb" if it is going to rival Google's internet business. However, he pointed to webmail as an area where Microsoft has a lead over Google.

"A good example is Hotmail, one area where Microsoft and Yahoo have a significant lead over Google, where there must be potential for more revenue," he said.

"In the business-to-business space, the most basic version of Office Live is to be advertising driven and there has to be a lot of potential here, but only if it can build a strong enough base of users."

Like Google's purchase of DoubleClick, Microsoft's purchase of aQuantive will attract regulatory attention, so there is a "small but finite chance" that it may not go through, according to the analyst.

"Microsoft is confident that the purchase will go through, claiming that the situation is different from Google-DoubleClick because there is no overlap between aQuantive and Microsoft," he said.

"Microsoft believes there to be considerable overlap between Google and DoubleClick. That raises a rather delicious prospect, from Microsoft's point of view, of Google's purchase being blocked while Microsoft's goes through."