• Seeking Alpha, Monday, May 21, 2007 10:45 AM

Microsoft's purchase of aQuantive last week could easily be perceived as an act of desperation. With a $6 billion price tag, it would appear that Microsoft overpaid, shelling out close to an 80 percent premium on the company's expected 2007 earnings in the all-cash deal.

Why pay so muc?s. Well, the Redmond, Wash. giant, worth $293 billion, certainly has the cash, but to understand the valuation, it's important to look at the value of its three core businesses: Avenue A/Razorfish, Drive PM and Atlas. The first two are services-based businesses, which launch Microsoft into new territory. You pay a fee and Avenue A/Razorfish will design you a Web site or create an campaign. With the ad network Drive PM, you set your own premium for buying targeted audiences or sales conversions through its ad network. The third, Atlas, is an ad-serving technology provider that competes with Google's DoubleClick.

Microsoft was less interested in Avenue A and Drive PM than it was in Atlas. Those two units will likely continue to operate on their own, but Atlas is more likely to expand Microsoft's business, because it's a full-service advertising platform and it's software-based, which is the company's specialty. In short, Microsoft needs the technology to allow them to deliver content, advertising and media to their captive eyeballs. They do not own it and do not have the time to build it, which is why Microsoft paid so much for aQuantive. It had to win this one.

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