Conceding that its giant acquisition of aQuantive Inc. hasn’t worked out as planned, Microsoft says it will write down the value of goodwill in its Online Services Division by a whopping $6.2 billion — almost as much as it paid for the Seattle-based online advertising company back in 2007, then the largest deal in Microsoft’s history.

The non-cash change to the company’s books doesn’t affect Microsoft’s day-to-day operations, but it’s a difficult concession for the company considering the impact that the aQuantive acquisition was supposed to have on its business. It will also be reflected in Microsoft’s profit-and-loss statement for the quarter ended June 30 — potentially causing the company overall to post a quarterly loss on paper.

“While the aQuantive acquisition continues to provide tools for Microsoft’s online advertising efforts, the acquisition did not accelerate growth to the degree anticipated, contributing to the write down,” says Microsoft in a news release announcing the change.

Goodwill is the accounting term for the amount by which an acquisition price exceeds the value of the actual assets being acquired — in other words, it’s the intangible stuff that a company like Microsoft believes will boost the value of its own business.

Microsoft CEO Steve Ballmer

Microsoft said it decided to make the write-down as part of an annual goodwill impairment test that companies are required to conduct for each of their business units.

Microsoft said in today’s news release: “Bing search share in the U.S. has been increasing, revenue per search (RPS) has been growing, MSN is the No. 1 portal in 29 markets worldwide and the company’s partnership with Yahoo! has continued to expand geographically. While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates.”

Seattle-based aQuantive had been a regional success story, employing thousands of people in digital advertising, marketing and technology. Microsoft sold Razorfish, the digital ad agency that had been part of aQuantive, for $530 million in 2009 to ad giant Publicis Groupe.

Microsoft made the aQuantive purchase as a defensive move after Google announced its acquisition of DoubleClick, seeking to keep up with its rival in the display advertising business.

However, attention in the Online Services Division quickly turned to Microsoft CEO Steve Ballmer’s ultimately unsuccessful bid to acquire Yahoo, part of an effort to beef up its offerings in Internet search and related advertising.

That lack of focus is part of the reason that the aQuantive integration didn’t go as planned. Many of aQuantive’s executives, including former aQuantive CEO Brian McAndrews, have long since left the Redmond company.

Microsoft’s $8.5 billion acquisition of Skype has since taken the crown as the company’s largest acquisition.

Comments

  • Guest

    I hope that this setback does not imperil future actions by Microsoft’s leadership. In other words, I hope that being once bitten does not make the board twice shy about future risks. Fortune favors the bold.

    • guest

      You’ve got that mixed up. It’s the actions of leadership which have imperiled Microsoft’s future. And there’s no “once bitten” about his. The majority of Microsoft’s acquisitions have been financial failures. The only difference this time is the numbers were too big to hide (MS’s preferred approach) or take just a partial charge (like they did with Kin+Danger two years ago).

      • Guest

        Don’t be so pessimistic. Microsoft will sell many, many billions of dollars’ worth of software, Xboxes, Surfaces, and services this quarter alone to erase this write-down.

        Of course the “majority” of risks don’t work out the way you want them to. That’s why you keep taking risks: to find the few that pay off big.

        Seriously, if you want a sure thing, buy Treasury bonds. You’ll get about 1.5% interest per year, less than even the dividend on Microsoft’s stock, but I think they’ll make you happier.

        • guest

          Again, you’re confused. They now have to sell many billions of dollars this quarter in order to offset the write down they’re going to take for this latest failed investment. Indeed, even that is unlikely to cover it. So looks like it will be a loss for the quarter. I guess all those PE calculations that argued MS was cheap based on expected earnings suddenly took a dramatic turn for the worse, huh?

          But you’re right, Treasuries are a much better investment than MS. They pay a little less than MS’s dividend, but that payout is better guaranteed. And they have maintained their face value over the last thirteen years while paying you that return, whereas MS has declined by 50%.

          • Guest

            Please don’t compare stock market returns from the peak of the NASDAQ bubble to now. That’s misleading. Over the last decade, from the trough of the bubble, Microsoft is up significantly and continues to pay a dividend. I like that investment strategy.

            Of course, I don’t look back when I make my investments. I look forward.

            (The poster of this comment owns no Microsoft stock and is not employed by Microsoft)

          • guest

            It’s not misleading at all. That’s the record under Ballmer. And even if you restrict the comparison to just other leading technology stocks of that era, thereby negating your “bubble” argument, it’s one of the worst performance records that exist. And those companies didn’t spend more than $100 billion buying back their stock. Even over the past decade it’s only up 10%, compared to 40% for the S&P and more than 100% for the NASDAQ. Add back the dividends and you’re still 30-90% behind even the averages. And let’s not even talk about where you’d be had you bought Apple, or numerous other technology stocks.

            You might like that investment strategy, particularly since you don’t own the stock. But most people with any financial savvy wouldn’t, and for good reason.

        • Guest

          Risk isn’t black and white. There are smart calculated risks and there are “sure things” that will lose money.

          Microsoft, with no history in advertising and a poor history in any content-related endeavors (Slate, MSN), getting into advertising and overpaying for it was pretty much a “sure thing” to lose money.

          This joins KIN, Zune and a host of other knee jerk “me too” actions that have been costly failures not only in terms of money but in terms of image and prestige.

  • guest

    An absolutely staggering admission. And somehow Ballmer still doesn’t get fired. I wonder whether the decision to take the impairment charge had anything to do with what appears to be a really tough quarter for the business overall? A little hide the bad news behind this one-time charge and hope nobody notices?

    • Guest

      There are accounting rules and auditors in place to prevent the just the scenario you describe. Goodwill is an accounting concept and there are rules around impairment analysis and how to calculate the amount to write-down. The company doesn’t just get to decide to write it all off to cover something else up.

  • guest

    “While the Online Services Division business has been improving, the company’s expectations for future growth and profitability are lower than previous estimates.””

    In many ways that’s even worse than the write-down.

  • http://twitter.com/DaQuantumFro DaMarico Fowler

    It’s all over folks pay your tabs and tip the bartender, Microsoft is DOOOOMED

  • http://twitter.com/DaQuantumFro DaMarico Fowler

    But I do agree with the other Guest and hope this makes them hesitant against taking risks but smarter about them

  • guest

    This will all be forgotten once they take the even larger write down for Skype.

  • guest

    So that’s what, about $15 billion (not counting acquisitions which weren’t publicly written down) that MS has lost in Online over the last decade? Meanwhile Google has actually increased share and made almost $9 billion in profit last year alone?

    Fire Ballmer. Start over.

    • Guest

      I’d rather have a risk-taker at the helm than nobody, which is the person whom you continue to advocate.

      Fire Ballmer? Name one person with whom you could replace him. Offer solutions, not whines.

      • guest

        Consistently wasting insane amounts of money on poorly thought out ventures doesn’t make Ballmer a “risk taker”. It’s makes him incompetent and dangerous, along with the board who has steadfastly supported him as he’s systematically destroyed Microsoft’s relevance, competitive position, growth, market cap, etc.

        • Guest

          Name one person who can do better.

          Let’s say that Ballmer and the entire board of directors is ousted in one go. You’re in charge. Who runs Microsoft? What do they do differently? (Looking for names and actions, not “anyone but Steve Ballmer” and “the opposite of everything Steve did.”)

          • TheBoardLovesOurStrategy

            Well that’s the one thing Ballmer has done well no? Purging potential replacements? Ray Ozzie was the most viable candidate for a new direction and look what happened to him.

            Call it the Saddam Hussein or Soviet management method.

            Of course look how those ended up long term.

          • guest

            Let me see if I’m following you. You’re saying Ballmer has also failed to groom any viable replacement despite that being the duty for all CEOs/senior managers and him having been in role for thirteen years? And the board, who by now should have insisted on there being one given Ballmer’s record and perennial calls for his replacement (including from well-regarded hedge fund managers who own the stock), also hasn’t? Thanks, for proving my point that both are incompetent and should be replaced.

            I’ve provided you with potential candidates previously. Anybody who actually understands technology and can think and act strategically would be a dramatic improvement.

          • TheBoardLovesOurStrategy

            Add to that someone whose VCR at home isn’t flashing “12:00″ like Ballmer’s.

            He is, hands down, the most technologically illiterate CEO in the industry. Just look at his answer a couple of years ago to the question about Google Chrome and ChromeOS and compare with Ray Ozzie’s.

            I suspect being Ballmer’s dedicated support person is its own hell. “Now, double click there….no, faster”.

          • Guest

            I’m sorry, but I don’t believe we’ve met before.
            I’d like to suggest that you offer concrete suggestions. Complaining while providing no alternatives makes you seen as a very negative person. That earns you a few points on message boards but it doesn’t contribute to your worth as a contributor in my or any organization.
            If someday you aspire to be more than an anonymous complainer, you’re going to have to be more constructive than you have been today. I want you to work on this.

          • Null

            Hey, Eric Schmidt’s free, right? ;) On a serious note there are better folks to manage this company–and it’s no surprise OP didn’t recommend someone specifically. How do you nominate and defend someone in 100 words? Either way, I think the buy and sell big business approach combined with stack ranking makes MS akin to IBM, Eli Lilly, and other residual-technology dependent firms.

  • jpm

    Who saw this coming? Oh, right: EVERYBODY

    • Enron2

      Everybody saw aQuantive as a failed investment. But of the dozens of analysts covering Microsoft, not a single one warned about a write-off this quarter, and certainly not one of this magnitude.

      • guest

        Analysts usually don’t focus on one-time non-cash charges

  • Bob

    This is why anyone with any sense stopped investing in MSFT more than a decade ago. Let’s put this write-off into perspective. That’s 1.5x the current market cap of RIM. It’s almost enough to buy Nokia. And it’s more than Apple spent on combined R&D creating iPhone and iPad, which together have put them in a leadership position for the future and relegated MS to the past.

  • Some guest

    The whole deal was probably a scam! People who justified that acquisition within Microsoft got huge promotions as a result of the value of the deal closed. My guess is they were in on kickbacks too. I can’t be sure. I was hired into that division from a top tier management consulting firm and I saw loopholes everywhere. Management coming from acquisitions and deserters from Yahoo flooded top management. They aimed to meet revenue targets from Qi Lu, without considering profitability. Organic innovation was killed. Rich internal talent was lost by the dozens each month through attrition and layoffs. Now they hire people who should not be in the technology industry, all in on the deal to milk Microsoft of its awesome benefits packages. I quit because the division seemed like it was about to implode. Bing’s growing market share and MSN’s ad revenue were the only silver lining. Both were developed within Microsoft, not acquired. Other parts of Microsoft were not keen on hiring anyone from the Online division. I believe Microsoft still has some of the best talent in other divisions, but they are trapped in political gamesmanship and forced bell curve review systems. I had to get the hell out when it was still good to leave.

  • guest

    You can probably count on one hand the number of CEO’s who ever had to write off a $6 billion “investment” after less than five years. And I doubt any of those kept their job afterwards. Where’s the accountability?

    This was a very unpopular deal at the time. Numerous analysts and media openly questioned the price paid and the likelihood of a future positive return (similar to the more recent and even pricier Skype deal), particular given Microsoft’s poor record in this area. Ballmer and other senior leaders swore up and down that they knew better, had a plan, and this time would be different. Well, this clearly says they didn’t. And it’s pretty cowardly to announce this via a press release, with even the normally tweet-heavy head of PR avoiding direct comment. Like writing off $6 billion and wiping out an entire quarter of earnings is business as usual.

  • Guest

    I guarantee you the execs who lobbied for this deal are still at MSFT with promotions/bonuses after the deal closed. No accountability there.

    • TheBoardLovesOurStrategy

      Absolutely. I mean, Roz Ho got a promotion AFTER the KIN debacle two years ago. Until this, that was their biggest clear failure. And you didn’t hear them announce anyone being let go as part of the write down. Odds are the people behind the acquisition are a couple of rungs higher than they were when they bought it.

      Of course, the employees working on KIN and now likely aQuantive DID get sacked.

      It’s all practice runs for this time next year when Windows Phone is still below 5%, Windows tablets are behind iPads, Kindle Fires and Samsungs, and Windows 8 sales are making Vista and Windows ME look like strong sellers. The leadership will get bonuses and promotions and the employees will be laid off en masse.

      You think 2009 was bad for layoffs? Just wait until 2013.

  • guest

    “Microsoft’s write-down … is explicit acknowledgment the deal failed.
    aQuantive’s ad platform was intended to boost Bing’s revenue prospects on the
    heels of Google’s April 2007 acquisition of DoubleClick. In hindsight, this was
    a “me-too” deal that benefited sellers and bankers, but did little to advance
    Microsoft’s search business [...] Investors will be justifiably skeptical of
    Microsoft’s apparent lack of M&A valuation rigor, particularly given
    subsequent premiums for Yammer and Skype.
    Nonetheless, we regard the aQuantive
    charge as “water under the bridge” and expect the impact on fundamentals to
    be de minimis.”

    -CLSA Asia-Pacific Markets’s Ed Maguire

    • Mark

      This speaks to the larger problem at MS. In most cases it enters new areas as a response to competitive threats rather than because it has studied the segment for some time and satisfied itself that a problem exists which it can uniquely address (Apple’s model). As a result it normally enters without a clear plan and ends up losing so much money and momentum up front while it basically learns the segment from scratch and puts together a plan on the fly, that eventual success or a positive payback becomes impossible. Rinse, repeat. Apple doesn’t. In many cases they don’t enter a segment at all. in others they enter a full decade late (phones and tablets), but reinvent the segment when they do because it’s the result of careful study and a well thought out and clearly differentiated plan. They did this initially because they couldn’t afford to do anything else. But it seems to have carried over even now that they have more cash than MS. MS meanwhile has always enjoyed an abundance of cash and has sadly squandered upwards of a hundred billion on various failed bets.

  • Chris Quelle

    Brian McAndrews and his team never wanted to work at MSFT. Note MCAndrew’s email sent to the entire company consisting of a compilation of complaints about Vista and Office 2007 collected from 15 of his friends. Great way to start off with a new employeer!

  • http://twitter.com/DarylUllman Daryl Ullman

    I must be the minority voice in this conversation as I think
    that from an Enterprise customer perspective breaking up the company into a “Windows
    Corp” and “Office Corp” entities will be counterproductive for millions of organizations
    around the globe, currently Enterprise customers are receiving cross platform technological,
    standards and Licensing advantageous that are driving consistency , cost efficiency, cross platform compatibility
    and manageability that have great value to IT, in addition what about products
    such as SQL Server and System center and Visual Studio where will they go? We need
    to remember that the Enterprise Customer game is different to the Consumer game
    and is about bringing the Client side (Desktop’s,
    Thin Client, mobile devices and so on..)
    to work and connect effortlessly with the Server side, this great advantage
    that currently Microsoft offers will be lost.

    This brings me to a more conventional approach that if
    breaking up the company, than break it up into two, one for “Enterprise products”
    and the second “Consumer Products”.

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