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Microsoft succumbs to deal heat

Everyone else is talking about the rabid pace of M&A activity in the ad serving sector, so I guess I want to weigh in also.

Here is a thought on each transaction:

  • $3.1 billion was a lot to pay for DoubleClick. Nice work by that team. The big focus on Project Wolf as the auction started probably worked wonders for that team. Google was the company that had the most to gain and the most ability to leverage value out of the platform, so it is not a super surprise that they were able to justify a higher valuation than anyone else.
  • Yahoo pays $840 million for Right Media and makes DoubleClick look reasonably priced. Everyone in the media talks about how Right Media “has projected revenues of $70 million in 2007”. Hey, it’s the second quarter. I assume they have a big hockey stick on that to justify the valuation, so the actual revenue so far is probably not a lot. Yahoo places a big valuation on a company whose upside has yet to be realized. For a bit more you could get a company with a similar product (Wolf) and a near monopoly on the ad serving business (with relationships everywhere).
  • Microsoft needs an adserver too and the second biggest one is still on the market! Go get it! The problem is that it is owned by this big professional services business. I haven’t seen anyone try to really break down aQuantive numbers, so I will take a quick shot based on Q1 results:
    • aQuantive is primarily a professional services firm. More than half of their revenue is professional services related. If you value that part of the business at the same multiple that Digitas is trading at right now (32x PE), it threw off profits of $10m in Q1 so let’s say that it is worth $1.4b. I was pretty generous there.

    • They have DrivePM, an advertising network. Let’s value that similar to ValueClick, which is doing well right now with all the press. (47x PE.) They had Q1 profits of $3.2m, so let’s say that business is worth $600m.

    • That leaves the adserver part of the business. It did $38m in revenue and $13m in profits. Let’s assign that a 50x PE and maybe it is worth $2.6 billion.

So then there is a $1.4 billion premium paid on the deal.  You could get there from here.  It is a stretch – Digitas’ PE is already inflated by the acquisition from Publicis, ValueClick’s PE in inflated by rumored acquisitions, these numbers are all big, so a premium on top of it is really big, but it’s possible.

If these numbers are kind of like the numbers they used, then Microsoft paid ~4-5x revenue for the professional services business.  That is aggressive.

Sounds like deal heat to me.

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