Microsoft Corp. said Friday that it would buy online advertising firm AQuantive Inc. for about $6 billion in cash, paying a hefty premium to try to catch up with major ad deals by competitors over the last six weeks.
In its largest acquisition ever, Microsoft snapped up the last of the big, independently owned concerns that focus on delivering targeted Web ads.
The deal escalated the battle for online advertisers and audiences as Microsoft, Google Inc. and other Internet giants continue to siphon ad dollars from traditional media.
Microsoft has faced criticism for moving too slowly to keep pace with Google, but it agreed to pony up nearly twice AQuantive's market value to acquire the Seattle-based digital marketer.
"These deals say that online advertising is a real market and is growing fast," A.G. Edwards & Sons Inc. analyst Denise Garcia said.
AQuantive is best known for its online advertising agency, Avenue A/Razorfish, which generated more than 60% of its parent's $442 million of revenue in 2006. But analysts said the prize for Microsoft was AQuantive's Atlas division, which helps companies place ads on their sites that are suited to the time of day and viewer. It also delivers video ads.
Microsoft's online competitors boast similar technology. Last month Google agreed to buy DoubleClick Inc. for $3.1 billion, and Yahoo Inc. said it would pay $649 million for the 80% of Right Media Inc. it didn't already own. Time Warner Inc.'s AOL credits much of its resurgence in online advertising revenue to Advertising.com, the ad-serving business it bought in 2004.
Microsoft, based in Redmond, Wash., offered $66.50 a share, far above the $35.87 AQuantive fetched when markets closed Thursday.
"The take-out price represents an astonishing 85% premium over yesterday's closing price, reflecting the scarcity value of quality Internet assets and [Microsoft's] lack of traction in online advertising to date," Youssef H. Squali, an analyst with Jefferies & Co., wrote in a research note to clients Friday.
AQuantive shares soared 78%, or $27.92, to $63.79 after the announcement. Microsoft shares fell 15 cents to $30.83.
Richard Fetyko, an analyst for Merriman Curhan Ford & Co., said AQuantive had surpassed DoubleClick to became the largest ad-serving system available to advertisers. "It's a very generous price," Fetyko said. "But they are buying the jewel of the online ad sector."
Microsoft's announcement came at a busy time for Internet advertising companies.
WPP, the world's second-biggest advertising company, said Thursday that it was buying 24/7 Real Media Inc. to beef up its online capabilities, six months after rival Publicis Groupe bought online marketing company Digitas Inc. And on Wednesday, AOL bought a controlling interest in German firm AdTech.
"The advertising industry is evolving and growing at an incredible pace, moving increasingly toward online and [Internet]-served platforms," Microsoft Chief Executive Steve Ballmer said in a statement. This "dramatically increases the importance of software for this industry."
Online advertising is on track to generate about $20 billion in revenue this year. Much of that comes from search-engine ads, which place so-called sponsored links to websites next to search results.
But as the interest in online advertising grows, major Internet companies are focusing more on delivering ads to other websites, said Mark Kingdon, CEO of Organic Inc., a digital ad agency owned by Omnicom Group.
"Everybody looked ahead and saw that search was a relatively small piece of the online ad potential," he said. "Now they're trying to position themselves for the next new wave."
As companies such as Microsoft become one-stop shops for advertisers, they face an inherent conflict of interest. In Microsoft's case, Avenue A/Razorfish buys ads on AOL, Yahoo and many other websites -- some of which compete directly for advertising revenue with Microsoft. And Microsoft's Internet units do business with many digital ad agencies that compete with Avenue A/Razorfish.
David Hallerman, an analyst with research firm eMarketer Inc., said the situation could spur competition within Microsoft that ultimately would benefit the company. Fetyko, on the other hand, said the inherent conflict might compel Microsoft to spin off or sell the agency unit and keep the ad-delivery technology.
Analysts said the competition among websites for brand advertisers would provide more ad formats and lower prices, broadening the appeal of Internet marketing.
ValueClick Inc., a Westlake Village online ad firm that had been considered a prime buyout target, gave potential acquirers some pause Friday when it said that the Federal Trade Commission was asking about some of its Web marketing practices.
The investigation concerns how ValueClick steered surfers to websites that promise free gifts. ValueClick said it was cooperating fully.
Jordan Rohan, an analyst with RBC Capital Markets, downgraded his rating on ValueClick's stock to his firm's equivalent of sell from hold. He cited the FTC inquiry and the AQuantive acquisition, saying Microsoft was less likely to buy ValueClick after snapping up the bigger digital agency.
Yet investors sent ValueClick shares up $2.12, or 8%, to $30 on Friday, betting that the acquisition spree wasn't over yet.