Microsoft buys aQuantive for $6 billion

NEW YORK (CNNMoney.com) -- Microsoft announced Friday it is buying online ad agency aQuantive in a $6 billion cash deal, paying top dollar to buy into the suddenly hot sector.

Microsoft (Charts, Fortune 500) paid $66.50 a share, an 85 percent premium over Thursday's close for aQuantive (Charts).

The deal is an indication of Microsoft's efforts to catch up in the growing online advertising space, and is just the latest deal in the sector, following recent moves by rivals Yahoo and Google.

"This deal takes our advertising business to a new level," said Microsoft Chief Operating Officer Kevin Johnson during a call with analysts Friday. "This allows us to take a bigger piece of that $40 billion pie that is still growing."

Microsoft executives said the deal was important, because many online services that the company is offering, from software to video games, become more dependent upon online advertising revenue.

Gartner analyst David Smith agrees the deal is a necessary one for Microsoft, given the changing economics of its business. But he said there are still questions about the deal beyond its costs.

"This is a big step, but they're still significantly behind Google," Smith said. "Integration is also going to be a challenge for them; they've never done an acquisition this big."

Microsoft executives said they were in a bidding war for aQuantive, although they did not identify the other bidder or bidders.

"We're happy with the price we paid. We believe it's exactly the right company to buy so we're willing to pay the value we are paying today," said Chief Financial Officer Chris Liddell. "We will use the strength of our balance sheet when we think it's necessary to drive growth going forward."

Smith said Microsoft has clearly been a conservative buyer in the past, walking away from deals it felt were too pricey.

"You can count four or five deals where they chose not to spend money and got outbid," he said. "That probably played a big role in them deciding to pay what it took."

Liddell said the deal does not signal that Microsoft will turn more to acquisitions to keep growing in the future, although he added, "We certainly have the economic fire power if we decide to do more." Microsoft had about $28.2 billion in cash and short-term investments on its balance sheet at the end of the most recent quarter.

There were reports two weeks ago that Microsoft was interested in purchasing rival Yahoo (Charts, Fortune 500) in a deal that might be worth $50 billion, dwarfing the acquisition of aQuantive. But Yahoo was apparently reluctant to pursue those talks.

Gartner's Smith said he doesn't believe the aQuantive deal signals either a new buying spree by Microsoft or the end of its interest in some kind of deal with Yahoo.

"A Yahoo deal could be a lot of different things short of an acquisition," he said. "There are potential relationships, partnerships, joint ventures that make a lot of sense, some which could see a large amounts of money going back and forth."

The earnings of aQuantive are miniscule for a company of Microsoft's size. aQuantive reported net income of $14.2 million on revenue of $142.6 million in the first quarter when it released results last week. Microsoft executive said that the deal will not cause them to change any short-term earnings guidance.

The moves follow Thursday's deal by WPP Group (Charts), the world's No. 2 advertising firm, to buy online advertising company 24/7 Real Media (Charts) for $649 million. Microsoft had been interested in buying 24/7 Real Media, according to some published reports.

Last month Yahoo (Charts, Fortune 500) bought the remaining portion of online ad firm Right Media that it did not already own for $680 million, while Google (Charts, Fortune 500) bought privately held DoubleClick for $3.1 billion.

Microsoft has raised antitrust objections to the Google deal for DoubleClick, and on the call Friday, Microsoft General Counsel Brad Smith said the Microsoft deal for aQuantive by no means changes any of those objections.

"Microsoft today is in none of (aQuantive's) businesses," he said. "Google and DoubleClick have strongly overlapping businesses."

The traditional advertising agencies have also been making purchases in the sector.

Last month the Interpublic Group of Cos. (Charts, Fortune 500) announced it was buying a privately held marketing agency, Reprise Media Inc., for an undisclosed price. Paris-based Publicis Groupe (Charts) purchased online advertising company Digitas for $1.3 billion in a deal announced in December that paid a 23.5 percent premium.

Shares of Dow component Microsoft slipped 26 cents, or 0.8 percent, to $30.72 in early trading Friday, while shares of aQuantive shot up $27.78, or about 77 percent, to $63.65.

One of the largest remaining independent online advertising firms, ValueClick (Charts), saw its shares rise 9.3 percent to $30.46 in early trading, on speculation that it could be the next acquisition target.