Maybe I should have been paying closer attention to my colleague Tim Beyers' call on Rule Breakers pick aQuantive (NASDAQ:AQNT). After all, the stock's up more than 150% since he called it a buy in January, with most of that gain coming today, after word came through that Microsoft (NASDAQ:MSFT) would buy the company for a cool $6 billion.
Good on Tim, and those out there who were prescient enough to buy what looks like a fine company. (Note to self: Read Rule Breakers more often.)
But ... you know it's coming ... what exactly is Microsoft thinking here? I mean, aside from "Sweet merciful Google! We'd better buy something before there's nothing left in Internet advertising!"
While aQuantive seems like a fine company with great strengths, I really don't understand how Microsoft will properly integrate some parts of it (like the creative teams) into a company whose primary goal is building open-ended tools for use by other people's creative teams.
Even more than that, I really have to disagree with the price. aQuantive generates admirable free cash flow, but everything has a proper price, and Microsoft sure doesn't seem to be paying it here. Discounting likely cash flows, and assuming a huge growth rate of 30% a year for the next half-decade (before some minor cooling), I'd value aQuantive at $45 a share on the very high end. By my math, Microsoft is paying 54% too much, even if things turn out great.
What of the old "cost-cutting and synergies" advantages? They'd better be huge. Chop out half of aQuantive's SG&A, assume the previously mentioned rabid rate of growth, and maybe, just maybe, you'll come out with a price close to today's offer. I wouldn't bet on that, though.
To this shareholder, the purchase smacks of desperation on the part of Ballmer and the Redmond wrecking crew. Maybe they've suffered a few too many blows to the head while watching Google (NASDAQ:GOOG) overpay for all manners of eyeball-generating properties. (At least aQuantive, unlike GooTube, is a real business, with real customers and cash flows.)
Sure, it may be tough to seem like a perpetual bridesmaid in the eyes of the short-sighted financial media. But most of the talking heads who shake their heads in pity every time Google outbids the House of Gates wouldn't know cash flow from a cashew. That's why they've consistently mistaken Microsoft's reluctance to overpay as some sort of failure on Redmond's part. To me, it's been smart business -- until now.
I hope I'm wrong here, and overly pessimistic. I'm sure I'm not the only Microsoft shareholder today who's looking at the exits and thinking about Fonzie, the leather jacket, and that shark.
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At the time of publication, Seth Jayson had shares of Microsoft, but no positions in any other company mentioned. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.
