Google, Apple and Microsoft

The new Microsoft-Google battlefield


By Kevin Murphy

Microsoft's $6bn gamble on aQuantive may have been a whopping 85% premium, but the acquisition is largely being viewed as a necessity for the company to speed up competition with Google, which recently made its own billion-dollar ad acquisition.

Adding aQuantive to Microsoft's existing adCenter business, while Google absorbs DoubleClick, may balance the scales of competition, at least a little, the rivalry between the two companies started before either deal was announced, and will accelerate before either deal has even closed.




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It's an open secret that both Microsoft and Google were interested in acquiring DoubleClick. The large premium Google wound up paying has been blamed largely on competing bids.

It has even been reported that Microsoft actually offered the higher bid, but that DoubleClick simply preferred to be acquired by Google. That rivalry may have spilled over into the aQuantive negotiating room too.

Microsoft's CFO Chris Liddell confirmed Friday what an 85% premium would suggest - there were other bidding companies whose offers pushed up the price. But was one of those companies Google?

It's possible. At the very least Google may have wanted to keep an oar in the talks just to force Microsoft to splash out more than it strictly would have wanted to.

And there are few companies, if one excludes the possibility of a private equity bidder, with the resources and the strategic need to pay over the odds for an online ad firm such as aQuantive.

Google had $14bn of current assets on its March 31 balance sheet. Even factoring out the $3bn it wants to pay for DoubleClick, it would have had the clout for a cash bid without necessarily searching for debt financing.

Yahoo, which has a strong advertising business already, would not have had the cash-in-bank for a fully cash bid, but it's not beyond the bounds off possibility that it was in the running anyway.

And it's not completely impossible that one of the other major online services firms, such as Myspace, or even an American ISP, would have been sniffing around.

Ignoring the fact that Google already faces the usual integration challenges of swallowing a large acquisition, there are other strong reasons Google may not have been particularly interested.

An obvious reason against Google as a bidder for aQuantive would be that it also faces the possibility of a close antitrust review with its DoubleClick acquisition, which would only be exacerbated by also purchasing an even bigger ad firm.

Indeed, it appears that, with Google and Microsoft winning their respective rounds at in the acquisition ring, the fight will continue in Washington DC and, possibly, Brussels.

Microsoft executives were asked during the acquisition announcement conference call Friday how they could simultaneously claims that a Google-DoubleClick combination would be anticompetitive while a Microsoft-aQuantive merger would not.

"The difference is very straightforward," Microsoft general counsel Brad Smith said. "The Microsoft-aQuantive transaction will promote competition and the Google-DoubleClick transaction will reduce competition, it's that simple."

His logic is that Microsoft and aQuantive have no overlapping businesses. Microsoft wants to get its hands primarily on aQuantive's third-party publisher capabilities, which will allow it to sell display advertising against other companies' content.

That's also one of the reasons Google bought DoubleClick, but both those companies already have a substantial presence in the third-party publisher arena.

"We believe that the [Google-DoubleClick] acquisition will give that combined entity 80% or more market share in that market," Smith said.

Smith said he expects the aQuantive acquisition to come under antitrust review in the US under the so-called Hart-Scott-Rodino rules, and possibly in Germany, but that he does not anticipate a close review by the EU, which has taken a much harder line against Microsoft than the US.

It's our view that neither deal will be blocked or substantially constrained by regulators. If US regulators can wave through the re-consolidation of the telecommunications industry, it seems unlikely they would have a big problem with consolidating the online ad industry.

It's difficult to say what the playing field will look like after these two mergers close.

It's fair to say that Microsoft has more of an uphill struggle. Its adCenter advertising platform combines search and display ad is relatively new but so far confined to Microsoft properties. Microsoft itself only started using it, discarding Yahoo's Overture, less than a year ago.

Microsoft's presence in advertising on third-party sites is negligible, whereas Google's problems with third-party sites are based largely on the fact that there are too many sites using Adsense, leading to gaming, scamming and the ever-present threat of advertiser unrest.

Microsoft will gain a third-party capability with aQuantive, but it will not immediately gain the kind of contextual advertising capability that Google and Yahoo have already built with AdSense and YPN.

These are important features for Microsoft. As online services become more distributed through web services, hosted applications and mashups - areas Microsoft is keen to exploit - the need to supply a revenue model equally as distributed becomes more important.

It's an area where Google has a substantial headstart. Web developers, content creators and users can already get their APIs, tools, services and revenue almost entirely from Google.

It is in that context that the $6bn acquisition, expensive under and other set of circumstances, should be read.