What Microsoft paid for the agency and what any holding company would shell out are vastly different figures -- although WPP holds an edge over other holding companies because it has assets Microsoft might be interested in, namely the ad-serving technology bit of 24/7 Real Media.
Here's how a deal could unfold, according to people familiar with the discussions: Microsoft unloads the agency in exchange for a WPP package that includes 24/7's Open AdStream publisher ad-serving tool plus cash. While Avenue A's price would be higher than most agency deals, very few interactive agencies with that kind of scale are available for acquisition.
"There remains a limit to the available talent that can be hired to pursue the rapid increase in interactive marketing-communications programs that customers are demanding," said John Prunier of boutique mergers-and-acquisitions advisory firm Petsky Prunier, although he stopped short of calling it a "boon for WPP" because of its cost. "In order to meet that need, agency holding companies and other marketing-communications businesses are going to have to acquire businesses/agencies that possess those skills."
So just how much would the agency cost WPP -- or Microsoft?
Consider that in May 2007 Microsoft dropped $5.9 billion for aQuantive's three businesses: Atlas, DrivePM and Avenue A. The deal was completed last August. While Microsoft was primarily interested in the first two businesses to help build out a massive ad platform, the latter accounted for 60% of aQuantive's revenue. While $3.5 billion -- 60% of $5.9 billion -- isn't necessarily indicative of Avenue A's valuation in the Microsoft-aQuantive deal, there's no way Microsoft would get even close to that for the shop. That figure approaches the market cap of WPP rival Interpublic Group of Cos. ($4.4 billion), and WPP's own market cap is $10.7 billion. Selling Avenue A for market value would only highlight how much Microsoft overpaid for the No. 2 player in the ad-serving space. (Weeks before the Microsoft deal, the No. 1 player, DoubleClick, was snapped up by Google for $3.1 billion.)
And that market value? In its 2007 annual report, Microsoft reported that aQuantive's agency business (Avenue A/Razorfish) brought in $345 million in revenue from Aug. 10, 2007 (when the deal was completed) through June 30. About 20% of a digital agency's revenue will typically be earnings before interest, taxes, depreciation and amortization, which means about $69 million in Avenue A's case. Today a digital shop, because of its growth prospects, can command a multiple of eight to 10 times that figure -- making Avenue A/Razorfish's estimated value about $800 million (a figure several M&A advisors and industry experts approximately agreed on).
For that kind of money, Microsoft might as well just hang onto it. And while the agency bit of aQuantive wasn't terribly applicable to what Microsoft was trying to build, then-aQuantive CEO Brian McAndrews, now a senior executive at Microsoft, felt the agency and the other businesses complemented each other and advocated keeping it part of the acquisition, according to people familiar with the deal. Plus, Avenue A/Razorfish may not be integral to Microsoft's strategy, but it's not bad as a growth business on the side, so there's not a pressing need to do something right now.
But if Microsoft could find the right sort of deal -- especially one that was based on assets, rather than a cash valuation that would obviously highlight the high price it paid for Avenue A -- Redmond might just go for it. "You'd have to believe it's a bit of an ugly [thing] for Microsoft [to sell at that price], not that they can't withstand it," said Seth Alpert, managing director of AdMedia Partners. "And if that's the case, the idea of an asset swap might be useful to mask some of the value questions."
And that's why some close to the dialogue think Martin Sorrell just might be the man for Microsoft. According to several people in the ad-serving industry, WPP is interested in unloading Open AdStream, the ad-serving business it acquired in its $649 million purchase of 24/7 Real Media -- another deal in which the acquirer was criticized for overpaying. Out of the 24/7 deal, WPP got a large search-engine-marketing business with a concentration in China, which served to make group Chief Executive Martin Sorrell Google's biggest customer, as he has noted several times since, as well as to bolster WPP's stake in the fast-growing Asia market. It also got an ad network, which serves as the basis for an automated media-buying system in which it is tapping into ad exchanges.
But having a publisher-side ad-serving tool is seen as less integral within WPP, so it has become a bargaining chip to get something the group would rather have: Avenue A/Razorfish.
According to several people familiar with WPP's thinking, M&A attention has turned to emerging markets in favor of the U.S. -- and Mr. Sorrell himself recently said that acquiring so many agencies could become problematic for companies like his and Omnicom because they run the risk of becoming too big and more challenging to control. It's also worth noting any WPP transaction could be affected by the progress of its hostile-takeover bid for TNS. If that deal fails to go through, it would allow Mr. Sorrell to be more aggressive on an Avenue A/Razorfish deal.
But one executive familiar with the aQuantive deal said, "WPP as a whole has a whole lot of bargaining power if creative minds got together."
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Contributing: Brad Johnson, Michael Bush, Rupal Parekh