In 2003, I began to buy shares in DCLK, VCLK, AQNT, Fastclick, etc. [Fastclick was bought by VCLK, eventually].
If it was in online ads, I was long. Over the years, I sold most of these shares because the stocks rose from high single digits to $20 or so. The one company I bought back every single time was AQNT. Today was the jackpot for AQNT founders when MSFT paid $66.50 a share or an 85% premium.
Matt Ingram asks is AQNT worth 2 times DCLK? Yes, I told him. He asked why? Others simply asked who is AQNT? Kevin Kelleher outright thinks MSFT is “bat-shit insane.”
So here’s my answer and my two cents on why AQNT is worth 2 x DCLK, in my humble opinion.
For one, I don’t think DCLK was worth $3.1B, but if DCLK went for $3.1B, then I can see AQNT being worth 2 x that. Yes, crazy talk. Welcome back to the crazy times.
DCLK is a software company whose upside is limited to a) the number of contracts it has secured and b) the number of impressions it serves. Indeed, on Google’s grid, these numbers - particularly b) - can grow quite a bit. But when a lot of people said Google just hit a home run in online advertising by buying DCLK, they were wrong because saying DCLK is an online advertising play is akin to saying MSFT is strong with ad agencies because ad agencies use powerpoint in their client pitches. DCLK sold all of its media assets to L90/MaxOnline when ad rates were low and no one really paid CPM rates, and got into software only.
AQNT, on the other hand, has technology, services and media assets. It is definitely the most diversified online advertising firm. MSFT’s own Don Dodge lists AQNT’s assets, which include:
MSFT now is an advertising company. Well, it’s an advertising and software company. The $6B price was the cost of entry. If it would have bought DCLK, it would have been an even bigger software company. TFSM would have been a second or third tier ad network, but AQNT is a top tier advertising company. I have told everyone and anyone to buy AQNT, as I did here, twice:
:: “AQNT: I told you so. Maybe You Should Listen to Me?” - Feb. 2007
:: “AQNT: I am telling you, Listen To Me! - Nov. 2006
- MSFT can now build world-class sites (AQNT bought Razorfish).
- MSFT can now plan, buy and create ads (AQNT owns Avenue A’s agency, which is the agency for hundreds of F500 advertisers).
- MSFT can now do so much more with email marketing.
- MSFT’s adCenter just became relevant, since Atlas DMT is DCLK on steroids and miles ahead of Dart for Advertisers.
That’s just online, on MSN.com, it can now offer advertisers a bit more than AOL can, and a lot more than Yahoo! can. In other words, this deal will help MSN catch up to Yahoo!
More importantly, MSFT just skimmed the top of the market, and not the bottom where ad networks like TFSM serve. DCLK also is a contract’s out clause away from losing a client. But AQNT is a relationship-based company and even if MSFT owns them, I don’t see many clients taking their business away because AQNT is a best-of-breed online advertising company, and by buying them, so is MSFT now as well.
Admittedly, it’s now an execution and integration risk management case…
Today those who listened made a tidy sum. This is actually very accretive to MSFT despite the $6B sale. Frankly, paying cash was smart because cash does not command much of a multiple, but this deal will command quite a multiple. And AQNT’s business - in 2006 AQNT reported net income of $53.9 million on revenue of $442 million - means that there’s enough there to start moving MSFT’s P/E AND P/S from a software multiple to an ad multiple. I know, MSFT makes $40B in revenue a year, so that’s only 1%, but MSN.com accounts for 1% and this just might be a case where 1+1= a lot more than 2.
This might be as smart as Time Warner’s Advertising.com deal, which today is hailed as genius and we put in our Top 10 Web Deals of All Time here.
UPDATE #1:
Paul Kedrosky points out that another blogger worked out the price paid per impression and this is twice as rich, it should be, because AQNT is no TFSM. AQNT is really the gold standard of online advertising. It is certainly worth $0.02 per impression if others fetched $0.01. But I would like to stress that while GOOG bought DCLK’s ad serving business, which is indeed a commodity and where revenue and price per impression matters, with AQNT, revenue and price per impression matters a lot less. In other words, the value driver for AQNT is not the quantity of advertising impressions but rather, the quality, and MSFT got the best online ad business.
UPDATE #2:
Another thing that was genius about AQNT’s strategy was that it spent 2006 buying up assets and becoming a more global play.
In 2006, AQNT Acquires a bevy of firms including Franchise Gator, a performance media company; Amnesia, an Australian interactive ad firm; Neue Digitale, a German interactive ad firm; and eCrusade, a Hong-Kong interactive ad firm. Aquantive also buys Accipiter Solutions, an ad-serving technology company.
This made AQNT a much sought after asset and trust me, $6B is a lot of money, but when you have $35B in cash, the mere risk of seeing someone else come into your backyard (Seattle, that is) and scoop up the crown jewel is reason enough to pay a hefty premium. In other words, not only were multiples lower last year, but devoid of deals like DCLK, TFSM, no way could have AQNT struck this deal, or anything near it… but biding its time, it scooped up assets, completed the crown, become the jewel itself and today struck gold.
Dang it’s a great time to be a Web entrepreneur…
UPDATE #3:
What’s that massive volume spike for AQNT at the end of the trading day yesterday? Did someone have a scoop and scoop in before the market close and buy a lot of shares? Average volume for the stock was in the 50,000 shares each hour, then right before market close, a massive, and I mean massive spike to 2.5M shares?
I don’t know, but it looks suspicious.
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