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Microsoft Corp., not wanting to get left behind rivals in an online advertising boom, agreed to pay $6 billion in cash to acquire aQuantive Inc. on Friday, a leading agency for Internet ads which also has powerful technology that serves display and banner ads to other Web sites.
The eye-popping premium of 85 percent Microsoft is paying for aQuantive reflects a heated race for the few remaining online advertising businesses, as media and technology companies jockey for position in the Internet advertising market.
The deal caps a month of furious activity in the sector which began in mid-April with Google Inc.'s $3.1 billion purchase of DoubleClick Inc., a company that provides technology used by Web site publishers to deliver advertisements to viewers.
Google is already the leading provider of keyword search advertising, which suggests "sponsored" links along with search results. Companies like DoubleClick and aQuantive help provide the delivery of "display" ads on Web sites such as banners and boxes, which lead users to advertiser's Web sites.
For Microsoft, getting aQuantive could jump-start its online advertising business, which lags far behind Google and Yahoo Inc. due to the lower traffic on its own destination Web site, MSN. The deal "certainly keeps them in the competitive arena with Google," A.G. Edwards analyst Denise Garcia says.
aQuantive's technology will allow Microsoft to deliver ads to third-party Web sites, something that should mesh with Microsoft's existing plans for delivering ads onto other platforms such as video games on its XBox, which connects to the Internet. Microsoft currently delivers ads mostly to its own Web sites, such as MSN.
aQuantive also has a significant interactive advertising agency called Avenue A / Razorfish, which buys, sells and creates online advertising - much like a traditional advertising agency, but online.
Microsoft, whose MSN site has struggled behind search leader Google and also Yahoo, is hoping the acquisition will help sell and deliver advertising on the Internet, a business that is on pace to grow nearly 30 percent this year, way ahead of other forms of advertising.
Kevin Johnson, the head of Microsoft's platforms and services division, which includes the Windows operating system and online services such as MSN, said there was a "competitive process" to acquire aQuantive, but he declined to talk about other bidders.
Piper Jaffray analyst Aaron Kessler estimates the online advertising market to be worth about $25 billion this year. Over the next five years, Kessler said he expects annual growth of about 17 percent.
Johnson said Microsoft was "committed to earning a bigger slice of that market opportunity" with the acquisition, but some analysts expressed surprise at the richness of the price.
Prudential Securities analysts John McPeake said in a note to investors that the deal "looks expensive" and that it wasn't clear why Microsoft would want to have a business that sent traffic to competitors, such as Yahoo and Google. "It just doesn't feel like it is in their DNA," he said.
But with rival Google now in control of DoubleClick - a major server of online ads - many industry experts believe it was imperative that Microsoft get in the market if it wanted to have any kind of scale in online advertising.
Sid Parakh, an analyst with McAdams Wright Ragen based in Seattle, described it as a good fit. "They needed to buy a company like aQuantive, that was not a question," Parakh said. "Did they overpay for it? Only time will tell."
The deal came just one day after advertising conglomerate WPP Group PLC acquired another online ad company, 24/7 Real Media Inc., for $649 million.
Yahoo made its move last month, agreeing to buy the portion of privately-held online ad exchange Right Media Inc. that it didn't already own for $680 million. In January, advertising conglomerate Publicis Groupe purchased the online advertising company Digitas.
aQuantive is the largest acquisition in Microsoft's history, but it won't be a big financial hit for the massive software company, which reported $28 billion of cash on its balance sheet for the quarter ending in March.
Shares of aQuantive jumped $27.92 or 78 percent to $63.79, while Microsoft shares slipped 15 cents to $30.83.
ValueClick Inc. - which runs an online advertising network along the lines of 24/7 Real Media - is now one of the last publicly traded companies of scale in the sector.