Why Microsoft Isn’t Likely to Sell Razorfish

NEW YORK When Microsoft inked a deal to buy aQuantive in 2007, many in the industry assumed it was a matter of time before it sold the Razorfish agency business. Analysts pegged Microsoft’s deal for the company as a play for aQuantive ad server Atlas, the rival offering to DoubleClick, which Google had purchased a month earlier. But for two years it has remained part of Microsoft.

Now, according to reports, Microsoft is shopping Razorfish, hiring Morgan Stanley to field offers for the digital agency. It has zeroed in, sources said, on two likely buyers: Publicis Groupe and WPP Group. Other agency holding companies, including Interpublic Group and Omnicom Group, are thought long-shot buyers, and private equity groups are unlikely to dive in, according to analysts.

Neither Publicis nor WPP will address the possibility, but each has reasons to want Razorfish, a top digital marketing player that now has global reach. Razorfish, combined with Digitas, which Publicis bought for $1.3 billion in December 2006, would represent what Forrester Research analyst Sean Corcoran called a “digital powerhouse.” Publicis CEO Maurice Levy has acknowledged the company is interested in building its digital business and has the balance sheet to make another large purchase.

WPP covets marketing services companies in new media. WPP CEO Martin Sorrell has tabbed three areas of growth for the firm: emerging markets, research and analytics, and digital media. He’s already made big bets in digital ($649 million for 24/7 Real Media in May 2007) and research ($1.9 billion for TNS last October). Razorfish would represent a bold move to shift the company away from its reliance on traditional advertising and media buying. Earlier this week, Sorrell told CNBC he’d be interested in Razorfish.

Yet the chances of a deal being struck in the near term remain remote, according to analysts. For one, the acquisitions market is moribund, with credit still hard to come by for an acquisition that would cost between $600 million and $800 million. Razorfish generated revenue of $408 million last year. WPP, in particular, would seem unlikely to have the financial wherewithal to make an acquisition, after shelling out nearly $1 billion on digital acquisitions over the past few years. It is still in the throes of integrating TNS, too. Even as Sorrell expressed interest, he said WPP earmarked about $160 million for acquisitions, a fraction of what it would take to get Razorfish. That leaves Publicis as the only likely candidate to take on Razorfish.

“There will be interest and bids,” said an investment banker. “Whether those are sufficient to satisfy Microsoft, I don’t know.” The source put the odds of a deal happening in the next few months at 25 percent.

What’s more, Razorfish has been able to navigate potential conflicts arising from its Microsoft ownership. The agency, for all intents and purposes, operates as an independent entity. Its CEO reports directly to Microsoft CFO Chris Liddell, in effect working outside Microsoft’s operating structure. While that would argue the agency is not core to Microsoft’s efforts to gain a foothold in online advertising, it also has enabled Razorfish to claim its ownership is basically a non-issue. Other than Apple business going away when it was purchased, Razorfish hasn’t lost business because of its status as a Microsoft unit. Perhaps more importantly, owning Razorfish hasn’t hurt Microsoft’s ability to build relationships with agencies. Witness its recent deal with Publicis to work on targeted TV ads together.

“There doesn’t seem to be a rush to make a sale,” said Corcoran. “It doesn’t seem like Microsoft has a real need to shed the business for any reason.”

Yet observers point more to a lack of buyers with resources as the reason a sale is unlikely to happen anytime soon. “In this market environment, it’s a huge play for someone,” said Linda Gridley, CEO of investment bank Gridley and Co.  

As for Razorfish, the company declines to discuss a possible sale. In a note to employees after reports first surfaced last week, CEO Bob Lord downplayed the possibility of a deal to employees.

“I don’t think it’s going to happen,” said Corcoran. “It’s a rumor right now.