Microsoft buys aQuantive: the bubble is back, this time with ads

Not to be outdone by Google in overpaying for online advertising companies, Microsoft will pay $6 billion for ad company aQuantive, corporate parent of Avenue A / Razorfish (link is to the Wall Street Journal article, subscription required). To put that in perspective, aQuantive's revenue last year was $442 million, so Microsoft is paying almost 14 times revenue for the company. Compare that with the Doubleclick acquisition by Google, where Google paid only 10 times its $300 million revenue. Microsoft's own Don Dodge even called even a $2 billion acquisition of Doubleclick out of line.

If anyone needed proof that the online ad business is in the middle of a bubble of valuations, this is an excellent data point. Blackfriars' survey of US businesses says that senior executives in US companies plan to spend less on marketing and advertising this year than in any quarter in the last three. With that as a backdrop, it will take Microsoft more than a decade to recoup the $6 billion it is investing in aQuantive, if ever. And with Microsoft already tapping deferred revenue assets to deliver numbers that Wall Street likes, throwing billions more at opportunities like this isn't going to help its stagnant stock price.

Said another way, while this deal may have strategic value to someone at Microsoft (clearly someone forgot to send the memo to Don Dodge), it makes no financial sense. And when we start seeing merger and acquisition deals that make no financial sense, that's when we know we're in a speculative bubble. And like all speculative bubbles, investors shouldn't be surprised when it pops.

Full disclosure: the author has no positions in the companies mentioned in this article.

Technorati Tags: Advertising, aQuantive, Google, Microsoft, Online advertising, Doubleclick