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Saturday, May 19, 2007 - Page updated at 12:00 AM

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For $6 billion, Microsoft buys huge slice of online-ad pie

Seattle Times technology reporter

On your favorite Web site, in your video games and on your mobile phone, digital advertising is already big and growing bigger. The complicated business of getting you to "click here" will be worth about as much this year as the state government will spend in the next two.

Microsoft on Friday announced the biggest acquisition in company history in a bid to grab more of what Microsoft estimates is a $40 billion global digital-advertising market from arch-competitor Google. The Redmond company that made its fortune building software will pay a premium price of $6 billion for aQuantive, a Seattle-based pioneer in next-generation advertising.

The high-stakes deal, which will be reviewed by regulators, is the latest in a string of recent advertising acquisitions that promise to reshape how commercials are bought, sold and presented online -- and who profits.

It also could start a new chapter for Microsoft with significant implications for the Puget Sound region.

The global technology giant has shied away from transactions of this size, spending $1 billion or more on acquisitions only four other times in its history. Its tendency has been to acquire smaller companies or just their technology, avoiding the potential pitfalls of combining large work forces.

If the combination with aQuantive goes well -- a process the companies will be planning in the next two months -- Microsoft executives could be emboldened to go after other major deals, said Mark Anderson, a technology analyst in Friday Harbor.

"Now that Microsoft has made this step, I think it's reasonable to assume that they may do it again," he said. "That would change the nature of what Microsoft is. It would have a large impact on Seattle, I think, because it would affect Microsoft's own growth rate."

The company had 76,539 employees globally on Feb. 23, fewer than half of whom work in the Puget Sound area. The addition of approximately 2,400 aQuantive employees, spread across 19 offices worldwide, will not slow the pace of hiring in Microsoft's other businesses, said Kevin Johnson, president of the division that will house aQuantive.

More high-profile acquisitions could also juice Microsoft's stock price, Anderson said, which has been largely stagnant over the past six years, much to investors' chagrin.

Microsoft shares dipped slightly on Friday to close at $30.83 each. Meanwhile, aQuantive stock skyrocketed almost $28, or 77.8 percent, to $63.79 a share. Microsoft is planning to pay $66.50 in cash for each aQuantive share.

For aQuantive shareholders, including those local employees who have stock in the company, the acquisition is a potentially huge windfall.

"When you see your stock double in price, you're pretty excited," Bob Lovestedt, a seven-year aQuantive employee, said as he and hundreds of colleagues filed in to a meeting with Microsoft's Johnson Friday morning. "Once sort of the initial euphoria wears off, then you're starting to think, 'Well, what about me?' "

Lovestedt said it was "too early to tell" what joining Microsoft would be like for aQuantive employees, but they appeared to be taking it in stride.

"I mean, it's been rumored about for years," he said. "Not a huge surprise with everything going on elsewhere with the other acquisitions."

No bargain buy

Microsoft is paying a premium price -- well above what several analysts thought aQuantive was worth -- likely because of a competitive bidding process and a frenzy of recent acquisitions in the industry.

In April, Google, which makes most of its money selling advertising next to results from its market-leading Internet search engine, announced a $3.1 billion purchase of DoubleClick, the biggest seller of online-display advertising, such as the banners that run along the top and sides of Web sites.

Microsoft was rumored to be a bidder for DoubleClick and has since complained to regulators that the deal puts too much control in the hands of one company -- the same charge that landed Microsoft in the protracted antitrust battle over its monopoly of computer operating-system software.

Microsoft General Counsel Brad Smith said Friday that the acquisition of aQuantive would not run afoul of antitrust laws because the two companies' businesses do not overlap.

Yahoo!, another Internet rival, said in late April it would spend $680 million for Right Media, which also sells online-display advertising and runs an exchange to connect online publishers with advertisers.

Tech analyst Anderson said Microsoft, which trails both Google and Yahoo! in making money from Web searches, had to take some action or risk falling further behind.

"Yahoo! was making moves, everybody was making moves, and Microsoft had visibly lost out on a couple of these battles at a time when they've got more money than God in the bank," Anderson said.

At the end of March, Microsoft had a $28.2 billion cash reserve.

Asked whether the acquisition is in part to prevent a competitor from getting aQuantive -- one the last large independent digital-advertising houses -- Johnson talked only of the opportunity.

"We looked at how rapidly this industry is consolidating and unfolding, and we felt like now was the time to put a stake in the ground that says we are going to take our advertising platform to the next level and we are committed to this industry for the future growth of our company," Johnson said.

Spending heavily

Microsoft has been investing heavily in new software and Internet services, including the popular Xbox Live online-gaming system. These initiatives are designed to be funded by advertising sales.

Johnson crowed about the audience of 500 million monthly visitors Microsoft attracts to MSN, Hotmail and its other Web sites -- an audience it can sell to advertisers.

Johnson said aQuantive's expertise and technology will allow Microsoft to provide "end-to-end" services to advertisers and online publishers that have advertising space to sell. The deal will also allow Microsoft to sell advertising on Web sites it does not own, something it can't do now.

This advertising consolidation raises the specter of conflicts of interest for companies that sell advertising across many Web sites but also own major sites of their own, said Andrew Frank, an analyst with the research firm Gartner.

Advertisers might find a better deal in a less-consolidated system in which they could do business with the best company in each segment of the business, "rather than having to choose 'Do you want the Microsoft solution or the Google solution,' " Frank said. "I think that's a danger not just for Microsoft but for the whole industry."

"Nice Northwest story"

It's not often that a major Seattle-area company is involved in a transaction of this size. Even rarer is the home-grown company that gets acquired by another local success story.

Anderson, the Friday Harbor analyst, said the path of aQuantive seems to be following a perfect script, starting with the local venture investors who funded it.

"Everybody did well. The company was the right company; the venture guys were smart enough to give them money and Microsoft was smart enough to buy 'em. It kind of makes you smile," Anderson said. "It's a nice Northwest story."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2007 The Seattle Times Company

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