Microsoft/DoubleClick Deal Seems Likely; Analysts Question $2B Purchase Price

by Laurie Petersen, Mar 29, 2007, 6:00 AM

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A Microsoft purchase of DoubleClick and its Dart technology would give Redmond a badly needed leg up in its battle against Google and add anywhere from an estimated $150 million to $200 million to its online advertising revenues.

Still, Microsoft shares dropped 8 cents to $27.64 on Wednesday after a trading day in which rumors of the sale first surfacing in a report on The Wall Street Journal Web site took on increased momentum--as in when will it happen, rather than if.

Global Equities Research analyst Trip Chowdhry called the deal "very likely" and said it makes sense because by acquiring DoubleClick, Microsoft can direct 100% of paid advertising insertions into MSN, the company's online services platform. He estimated that Google could lose up to $120 million in ad revenue should Microsoft buy the company.

San Francisco-based Heller & Friedman is seeking at least $2 billion for DoubleClick, according to the Journal--looking to nearly double the $1.1 billion it paid for the New York-based company in 2005. DoubleClick has enlisted Morgan Stanley to help explore its options, including a possible stock market listing, the Journal reported.

"DoubleClick provides a web-publishing platform for Internet ads that we believe would provide a boost to Microsoft's online services ambitions which have so far been lackluster," wrote AG Edwards analyst Kevin Buttigieg. "DoubleClick is seeking at least a $2 billion valuation and has about $150 million in annual revenues. This would be far less than a purchase of Yahoo! by Microsoft, which has been long rumored and feared by investors, though Yahoo! has a much broader portfolio than DoubleClick."

The Journal also reported that Google is planning its own ad serving technology in coming months, which would make the time right for a move by DoubleClick.

Merrill Lynch analyst Lauren Rich Fine issued a research note suggesting the $2 billion price tag was probably high because it would suggest EBITDA multiples of 30X+ if DoubleClick has similar margins to competitor aQuantive's Atlas ad-serving software business.

"aQuantive's current market cap is around $2.4 billion and its ad serving business, Atlas, is expected to generate approximately $150million in revenues in FY07 as well. If DoubleClick can fetch $2 billion, this could imply that aQuantive shares are highly undervalued and its agency business is worth only $400 million," Fine wrote.

Most interactive agencies, she added, have fetched more than 20x-25x EBITDA. Valuing aQuantive's agency business at these multiples implies a value of approximately $1.7bn, and including $2bn would suggest upside potential of 54%.

DoubleClick went public in 1998 at a split-adjusted $4.25 a share and reached a record of $134 on the first trading day of 2000. Its shares collapsed along with other Internet stocks in March 2000, and it traded as low as $4.53 on Aug. 5, 2002.

Shares of aQuantive fell 6 cents to $27.40 at 4 p.m. New York time in Nasdaq Stock Market trading on Wednesday, and competitor ValueClick shares rose 8 cents to $26.52.

Earlier this year, Publicis Groupe SA bought Digitas Inc., a Boston-based online ad agency with sales of $565.5 million, for $1.3 billion.

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