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Business Impact

Microsoft to buy online ad firm aQuantive for $6 billion, in company's largest acquisition

about $6 billion in cash, paying a premium to catch up with major ad deals by its competitors over the last six weeks. Shares of aQuantive soared more than 77 percent.

It is the largest acquisition in the software company’s history, said Kevin Johnson, president of Microsoft’s platforms and services division, in a conference call following the announcement.

The $66.50-per-share purchase price represents an 85 percent premium to aQuantive’s Thursday closing price of $35.87.

Acknowledging that paying such a substantial premium is something Microsoft has avoided in the past, Chief Financial Officer Chris Liddell said the company believes aQuantive is ”exactly the right company to buy” to help position it in a growing market.

Estimates put the online advertising market at $40 billion, and it is expected to grow at a rate of 20 percent a year, Liddell said.

The two companies have ”very complementary” technologies, Johnson said, adding that by bringing them together, there is ”significant value” to be unlocked.

The company is still far behind Google Inc. and Yahoo in search traffic and thus, search advertising revenue.

The announcement comes just one day after WPP Group PLC, the world’s second-largest advertising and marketing conglomerate, said it would buy online advertising company 24/7 Real Media Inc. for $649 million. Microsoft had been widely seen as a potential bidder for 24/7.

Last month Google Inc. agreed to buy online advertising company DoubleClick Inc. for $3.1 billion, and Yahoo Inc. struck a deal to buy the privately-held online ad exchange Right Media Inc. for $680 million. Microsoft had expressed interest in buying DoubleClick before being trumped by Google.

”Today’s announcement represents the next step in the evolution of our ad network from our initial investment in MSN, to the broader Microsoft network including Xbox Live, Windows Live and Office Live, and now to the full capacity of the Internet,” said Microsoft Chief Executive Steve Ballmer in a statement.

The deal is expected close in the first half of Microsoft’s fiscal 2008. The acquisition is not expected to significantly affect the company’s prior financial guidance. In fiscal 2008, it will ”clearly” add revenue, but will not affect earnings per share or operating income, Liddell said.

Under the terms of the agreement, if the deal is broken up under certain circumstances, aQuantive would be liable to Microsoft for a $175 million breakup fee. But, if it fails for lack of regulatory approval under certain conditions, Microsoft in turn could be on the hook to aQuantive for $500 million.

The purchase price represents about 2 percent of Microsoft’s market capitalization.

With about 2,600 employees, aQuantive will continue to operate from its Seattle headquarters as part of Microsoft’s online services business. The company, which operates marketing services firm Avenue A/Razorfish, reported 2006 profit of $54 million on sales of $442.2 million.

Shares aQuantive rose $27.68 to $63.55 in morning trading, while Microsoft shares fell 35 cents to $30.63.

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