Sizing up Microsoft's Aquantive deal

Aquantive who? The company Microsoft is acquiring for its highest purchase price ever may not even register on the radar of most consumers.

But it's a well-known entity in the online advertising industry and can give Microsoft some much-needed — if pricey —ad-serving technology, some industry experts said.

Microsoft said it was buying Aquantive early on Friday, shocking many observers with a $6bn purchase price, which is three times the amount it has paid for any other company and an 85 percent premium on Aquantive's closing stock price on Thursday. It is also double what Google agreed to pay for DoubleClick last month. Aquantive's stock rose nearly 80 percent after the deal was announced.

"That's a heck of a premium," said Charles Moldow, a general partner at Foundation Capital and a former mergers and acquisitions banker at Merrill Lynch. Maybe "they feel like they want to complement their current [ad] traffic and feel like they can bring these capabilities to the market and this is the only way in their mind to do it — in a fast way. Otherwise I don't see the urgency."

There has been a recent buying frenzy in the online advertising sector as companies try to grab bigger pieces of the lucrative market that is expected to continue to grow as more people turn to the web for their entertainment and information. After Google said it was buying DoubleClick, Yahoo announced it was snapping up online ad exchange company Right Media for $680m. Earlier this week, WPP Group said it would buy ad-serving company 24/7 Real Media for $649m. Microsoft had been rumoured to be in talks to buy 24/7 Real Media, too.

"Clearly there was a sense of scarcity value," Moldow said. "Sometimes it's good to be the last independent guy standing."

Randy Haykin, managing director at Outlook Ventures, said Microsoft's Aquantive purchase was a "defensive manoeuvre" in a consolidation wave that started when AOL bought online ad network Advertising.com three years ago for $435m.

"Who would have guessed years ago that this sort of 'vertical consolidation' would occur between the search/portal players and the ad networks," he said. "I believe that Google's domination of the advertising market has prompted this concoction."

Aquantive is based in Seattle, not far from Microsoft's Redmond, Washington headquarters. It is a holding company with properties that include the Atlas Media Console ad buying and management tool; Drive Performance Media, which buys and resells online ads targeted to user behaviour; and Avenue A Razorfish, a creative agency and ad broker for clients that include McDonald's, Nike and Microsoft.

"Aquantive is a very significant player in the online advertising arena. It's one of, if not the largest buyer of digital media," said Derek Brown, an analyst at Cantor Fitzgerald.

The Atlas Media Console allows advertisers to buy and manage advertising campaigns on websites. It "provides Microsoft with a toehold into advertising done across the entire web, including on Google, Yahoo and Microsoft and many other sites, an ability Microsoft has not historically had", Brown said. Plus "it's a new revenue stream".

The online advertising market is $40bn globally now and is expected to grow at least 20 percent each year for the next few years, said Kevin Johnson, Microsoft's platform and services unit head.

"We are deeply committed to building a great advertising business. This investment in the monetisation capability for our future services is key," he said. "As a company, we've made a strategic bet that we are going to shift more and more things to this concept of software plus service, where we complement our software offerings that run on intelligent devices on the edge of the network with services delivered over the network. Many of those services will be monetised through online advertising."

Like other online ad consolidations, Microsoft faces challenges if it wants to avoid a conflict of interest, said Tim Hanlon, a senior vice president at Denuo, a consulting arm of advertising agency Publicis Groupe. The proposed Microsoft-Aquantive deal would bring together under one roof a media agency that buys ad spaces on behalf of advertisers, an ad-serving technology provider and a seller of inventory in MSN, which will result in the buying and selling of ad inventory from within the same company, he said.

"If I'm a marketer I have to be very careful how I choose my agencies because some of them now may come to the table with institutional or internal biases about particular software, hardware or technologies because they are part of the same company," Hanlon said. "It remains to be seen what stays in the company and what maybe gets spun out and sold because of these conflicts."

CNET News.com's Ina Fried contributed to this report.