Microsoft $6 billion purchase gets thumbs down from research group

Stan Beer
Monday, 21 May 2007 17:13

IT Industry - Strategy

Research group Ovum has given the thumbs down on by far Microsoft's largest ever acquisition, the US$6 billion purchase of online marketing agency aQuantive, saying the new addition to the Redmond software company's stable will not make a huge impact to its business.

Microsoft's purchase price was a staggering 14 times 2006 revenue and an 80% premium on the company's share price before the acquisition and Ovum research analyst David Bradshaw poses the question of how could a business that had revenue of US$442 million and an operating profit of US$80 million be worth such a large amount.

“The answer is only if Microsoft can use this purchase to drastically improve its share of the online advertising market, which some estimates put as high as $40bn in the last year," says Bradshaw. "There are two main factors that drive success in the online advertising business, the strength of your web presence and how effectively you monetize that web presence.

“On the first point, Microsoft still has a mountain to climb in building its web presence to rival Google as the near-default web page for business and home users. A good example is HotMail (this is one area where Microsoft - and Yahoo! - have a significant lead over Google), where there must be potential for more revenue. In the B-to-B space, the most basic version Office Live is to be advertising driven and there has to be a lot of potential here, but only if can build a strong enough base of users.”

“On the second point, eQuantive's expertise in the advertising market will clearly be useful in increasing the effectiveness of the monetization. However, aQuantive cannot favour Microsoft-owned sites because this will damage the rest of its business.  Overall, then, we cannot see how aQuantive can make a huge impact.”

It seems obvious therefore that at least some analysts view the latest Microsoft acquisition to Google's recent purchase of DoubleClick, which has sent serious alarm bells ringing in the boardrooms of the search leader's competitors.