DoubleClick sales rumors heating up

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Rumors swirled at press time last week that Microsoft Corp. was close to acquiring DoubleClick, a New York-based ad serving and marketing technology company.

According to several sources, DoubleClick has been working with investment bank Morgan Stanley to explore a variety of options, including going public.

Neither Microsoft nor DoubleClick would comment on the speculation of an imminent deal, first reported in The Wall Street Journal. But observers said that DoubleClick has been on the block for a while.

"They've been shopping it around," said David W. Cearley, VP-emerging trends at Gartner. "I wouldn't be surprised at all to see this happen."

Founded in 1995 and originally called Internet Advertising Network, DoubleClick serves as the middleman between marketers and publishers in the online ad marketplace. Its product line, known as DART, enables agencies, marketers and media companies to target, deliver and track online advertising. It boasts more than 1,500 clients and handles ad serving for display ads, rich media ads, affiliate marketing and, more recently, search marketing.

Owner seeking $2 billion

DoubleClick is majority-owned by private equity firm Hellman & Friedman. A source quoted in The Wall Street Journal story last week said the private equity firm, which took a controlling interest in DoubleClick two years ago for $1.1 billion, is seeking $2 billion for the company. Hellman & Friedman declined to comment for this story.

Reed Phillips, co-founder and managing director of media investment bank DeSilva & Phillips, said DoubleClick has been angling for a sale for at least a year. "DoubleClick is hoping it is either Microsoft or Yahoo because they can pay the $2 billion without blinking," he said.

DoubleClick has sold off pieces of the company during the past two years to concentrate on online services. Most recently it sold its Abacus data management unit to Alliance Data Systems Corp.'s Epsilon.

"They've sold off the individual pieces of the business as the market gave them the opportunity," said Shar Van Boskirk, senior analyst at Forrester Research. "This last piece, the online ad business, has taken a little longer to polish."

Van Boskirk said advertising took a hit when the dotcom bubble burst, but the popularity of search has breathed new life into the medium. "Online advertising is back in vogue," she said.

Microsoft seeks online share

Microsoft is scrambling to catch up with Google for a piece of the online market. Microsoft was late to the search dance, launching its own technology only two years ago. It has played catch-up ever since, clocking in at a distant third to Google and Yahoo in terms of share of total searches. In February, Microsoft commanded 10.5% of searches, compared with Google's 48.1% and Yahoo's 28.1%.

Last year, Microsoft launched adCenter, its paid search product.

"Getting into the advertising business in a bigger way is what Microsoft has to do to compete with Google," Cearley said. "You have Microsoft in fierce competition with Google for next-generation applications and Web-based environments, and they'll need to shore up their capabilities in advertising."

Others agreed.

"[It] wouldn't change overnight, but Microsoft would be in a much stronger position vis-à-vis online advertising," Phillips said. "Double- Click is a key linchpin in the online ad equation."

In addition to Microsoft, Google, Yahoo and AOL have also been cited as potential suitors for DoubleClick.

As for Google, some say it is more apt to build its own technology.

John Battelle, chairman of Federated Media, an online media company, commented on the rumor in his blog: "Google can't let this stand. It's a major risk to its business to force advertisers to change behavior. It needs a third-party ad serving solution. So it will, without a doubt, build one."

Van Boskirk agreed: "I would be surprised if Google is interested, because they're more proprietary. I'd think they would build their own."

Not so, said another analyst.

"I think Google is obviously considering it," said Mark Stahlman, technology strategist for Gartner Invest, a Gartner business unit that handles institutional investors.

"The majority of sales that go through Google are [small and midsize businesses]," he said. "Google is already offering services to these customers; this is the kind of business Google is also interested in."

Google had no comment. "We do not comment on market rumor or speculation, said Google spokesman Jon Murchinson.

Others said Hellman & Friedman's rumored $2 billion asking price is too high.

Lauren Rich Fine, a research analyst at Merrill Lynch, said in a recent report that "a $2 billion price tag for $150 million in revenue seems steep, as it probably implies an EBITDA multiple of 30 times-plus if DoubleClick has similar margins to aQuantive's Atlas ad serving software business."

Steep price to compete

The steep price may be worth it to Microsoft, whose main competitor is no longer IBM. Google has that honor these days.

"Do they need a few hundred million dollars more in revenue?" Stahlman asked. "No. Microsoft's goal is to be the service bureau to which every small and medium business must go." He said the whole intent of Vista and the host of products that surround it "is aimed at the portion of the marketplace that IBM can't reach."

Stahlman said Microsoft has finally conceded IBM has the lock on the large enterprise accounts. "GE belongs to IBM, not to Microsoft," he said, adding that the SMB market offers the most opportunity to the Redmond, Wash., software giant.

"Microsoft is going to try to match Google's infrastructure, and they're going to aim that towards the high end of the SMB market," Stahlman continued. "I view a potential DoubleClick acquisition as acquiring the people who understand business services that Micro- soft can add to the rest of the services it is rolling out." M

Reporter Matthew Schwartz contributed to this story.

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