Microsoft Considers Unloading aQuantive’s Avenue A/Razorfish To WPP; Possible Price: $800M — Report

imageMicrosoft’s talks with WPP Group seem to be taking a more serious turn on the subject of the software giant selling off digital ad shop, Avenue A/Razorfish, AdAge reports. Microsoft (NSDQ: MSFT) acquired Avenue A/Razorfish when it bought parent aQuantive last August for about $6 billion. That purchase also included other aQuantive properties, among them ad network Atlas and digital marketing solutions provider DrivePM.

Initially, Microsoft felt the online agency business represented by Avenue A/Razorfish was fairly ancillary to creating an online ad platform that would compete with Google (NSDQ: GOOG) and DoubleClick. But Brian McAndrews, at the time aQuantive’s CEO and now SVP for Microsoft’s Advertiser and Publisher Solutions Group, convinced Microsoft to accept the unit whole. Six months in, however, Microsoft began having a change of heart and looked for potential buyers who might be more interested in taking the agency business. So far, the main prospect has been WPP CEO Sir Martin Sorrell.

Avenue A/Razorfish’s value: about $800 million: Avenue A/Razorfish contributes roughly 60 percent to aQuantive’s total revenues. Calculating its worth based on what Microsoft paid for aQuantive would value Avenue A/Razorfish at roughly $3.5 billion. No one is going to pay that price, especially an ad firm. As AdAge pointed out, that figure would be close to WPP rival Interpublic Group’s $4.4 billion market cap (incidentally, WPP’s market cap is $10.7 billion). According to Microsoft’s 2007 annual report, Avenue A/Razorfish had $345 million in revenue from Aug. 10, 2007 through June 30. And factoring in about 20 percent of a digital agency’s revenue as EBITDA, that comes to approximately $69 million in earnings for Avenue A/Razorfish. Despite a brutal ad economy right now, digital agencies’ potential growth means that a shop could command eight- to 10 times that figure, AdAge said. And so, the magazine cites a consensus of unidentified M&A experts who say that Microsoft could get around $800 million for the shop.

A trade?: In the meantime, given the health of the business, Microsoft isn’t necessarily rushing to get a deal done. But WPP has a few reasons for its sudden eagerness. AdAge, citing several unidentified sources, said that WPP wants to get rid of one its companies, Open AdStream, which runs an ad serving platform which it acquired as part of its $649 million purchase of 24/7 Real Media in May 2007. As an owner of agencies, online ad serving is not a top priority for WPP. And so, with Microsoft’s disinterest in the agency side, and WPP’s less than high regard for the ad serving business, the two seem to have the perfect match for a swap. Still, Sir Martin has repeatedly said that his M&A focus is in emerging markets, particularly Asia. And he still has to sort out his battle to take over audience measurement firm TNS. But if the TNS business gets sorted out — and it appears that situation could be ending sometime soon — that could clear the way for Sir Martin to open up WPP’s checkbook for Avenue A/Razorfish and include Open AdStream as well.