aQuantive bites off $6.2 billion from Microsoft
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looks like Microsoft’s (NASDAQ: MSFT) past has come back to haunt it once again. Remember the $6.3 billion acquisition of aQuantive back in 2007? Well, the guys at MS recently announced a startling $6.2 billion write-down in connection to the online advertising company.
Of course, this would mean that Microsoft’s upcoming fiscal fourth quarter results are not going to look so good. Analysts on average expected about $5.25 billion in revenue for the quarter. But now it seems as though the bottom line will dip into the red for the first time in almost 20 years.
Great expectations
Microsoft expected aQuantive to bolster its online advertising revenue to a great extent. A few months after Microsoft's acquisition, Google (NASDAQ: GOOG) bought a similar digital advertising firm called DoubleClick for $3.2 billion.
Since then, Microsoft lost $9 billion in its online services division, while Google on the other hand, managed to double both revenue and profits, most of which came from its advertising programs. Hmm... kind of embarrassing for Microsoft.
Microsoft’s core business centers on its Windows operating system and Office solutions. So maybe they couldn’t quite balance many things at once. Besides, they were trying to compete with a well-established player called Google. So I’d say the probability of failure was quite high from the get go.
Should Microsoft quit from the online services space?
Many of you might say yes. But I don’t think so. Getting rid of it altogether can be likened to sending a car to the scrap yard just because its fuel tank is empty. Not a very wise thing to do.
The division has seen some growth in revenue over the past few years. And despite Bing being an underdog in the search space, you can’t deny the fact that its market share has risen from 8.4% since its debut, to 15.4% at present, though most of this market share came from Yahoo (NASDAQ: YHOO). And even if MS does lose money in this space for the short term, it shouldn’t have a significant impact on the company’s performance as a whole.
In the long run, the division can make a turnaround. I concur with International Data Corporation (IDC) analyst Karsten Weide’s view that the launch of Windows 8 and the release of more Windows smartphones and tablets could go a long way to promote MS's online services. Windows-based smartphones and tablets will be an important factor in driving traffic to Microsoft's online services such as Bing. This in turn should translate into higher ad revenue and possibly a higher market share as well.
The Bottom Line
Yes, aQuantive didn’t generate the kind of advertising money Microsoft was hoping for. But then the company should not have forked out a hefty 85% premium for the acquisition in the first place.
Should shareholders worry? Well, not too much. Plus, judging from Microsoft’s stock price movements on Tuesday, Wall Street didn’t take the write-down as a huge negative.
Nevertheless, MS definitely needs to buck up and show some use of its Skype and Yammer acquisitions for which it paid billions more. Perhaps we may see some clarity on that once Windows 8 is released.
So what are your thoughts on Microsoft? Feel free to comment in the space below.
kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
