The paper analyzes the online advertising network business from an M&A perspective in light of Google’s $3.1 billion acquisition of DoubleClick.

DeSilva+Phillips predicts a “long tail” of revenue, profit and scale for the smaller ad networks out there – as long as they capitalize on ad exchanges. There is still a great deal of unsold inventory, and the ad exchanges offer considerable scale to advertisers while remaining too small to attract Google or Yahoo’s attention as bolt-on additions, the paper predicts.

New “aQuantives” may emerge, with midsize independents like Casale and Tribal Fusion doing roll-ups on their own — and, accordingly, becoming acquisition targets themselves, DeSilva+Phillips says.

DeSilva+Phillips specializes in media and digital media industries and has completed almost 200 transactions with a total value of more than $8 billion.

The regulators have long been expected to approve the $3.1 billion merger – in January, the European Commission abstained from formally objecting to the deal. Bloomberg is reporting that the takeover will likely go through without conditions – an unyielding response to repeated complaints from Microsoft Corp., which argued that the merger would threaten competition. (Funny, didn’t they buy online ad agency aQuantive for $6 billion in May?)

The deal could go through as early as March 11. If the acquisition pans out, Internet goliath Google’s PPC online ad dominance combined with DoubleClick’s display ad supremacy will create a sprawling Web titan.

The Federal Trade Commission approved the merger in December.

2007 certainly didn’t lack for momentum. The global spend for online advertising increased by nearly 30%, and companies partied like it was 1999, buying anything and everything in a land rush for online advertising firms. Social networks and widgets rose from the shadows somewhat to make a big splash and many debate over their true value, and then there was the threat imposed by the recession; plus, does anyone know what has been happening at Yahoo? However you look at it, it was another landmark year for the industry, and somehow, most of us came out intact.

The major acquisition frenzy of ’07 started with an entirely different type of Spring Fever than most of us are familiar with. When Google beat out rival Microsoft in a bid for advertising serving company DoubleClick for $3.1 billion, the gloves came off and the trend of inflated acquisitions and investments took off like it hadn’t since the last time we saw a bubble like this. Flexing its muscles, Microsoft quickly acquired aQuantive for an astronomical $6 billion and then the third competitor in the very visible U.S. trifecta of media giants Yahoo, bought RightMedia for a comparatively modest $680 million. But let’s not forget to mention some of the others that joined the club like WPP Group acquiring 24/7 and AOL acquiring Tacoda. The irony is that out of all of these spending sprees, Google’s is the only one yet to be approved for completion. Left and right money was tossed at companies in the hopes that online ad revenue gold would be accumulated in a very short amount of time.

This mentality spilled over into the funding area as well, especially in social media. This was the year of the widget and the social network. With open applications launching Facebook into the spotlight, the three-year-old site gained speed this year and even received $240 million by Microsoft for a 1.6% share of the company which values the company at $15 billion. This is a lot of faith and it will take another year or two to see if this investment will pay off. And just like our favorite pop-tarts, once these sites gained a little more press, they started messing up. Facebook put in a faulty targeting strategy called Beacon, Orkut was being investigated for child pornography pages, and MySpace’s newest owner was publicly expressing doubts about the purchase due to slowing growth. The list goes on. Widgets on the other hand are making a recognizable impact on the industry. These small pieces of programming, which started the social media pick up this year, have been seen everywhere. They’re like Kinko’s or Starbucks now. You can hardly enter a site without seeing widgets or having the ability to download one. These interactive units are getting big recognition and show no signs of slowing down.

The starting recession has impacted the industry somewhat, but where the real implications are, are in the early part of this coming year. If financial services aren’t making money, they will have to cut their budgets and the financial services industry takes up half of the spots for Nielsen’s top ten online advertisers. It looks as though this may be the pin-prick that finally bursts the bubble. And then there’s Yahoo. When Terry Semel was replaced by Jerry Yang this past summer, there was a lot of buzz and hope that this change may be what Yahoo needs to gain back the momentum it once had. However as the months went by, more and more executives continued to leave Yahoo. This to a certain degree was a surprise, but to many industry insiders became a clear warning sign for the future of the company. Although Yang is a smart guy, he isn’t looking like the man for the job and yet, theirs is still some faith that the company has enough potential to pull through and make the turn happen. Perhaps it will be the work of Susan Decker, or maybe this one-time front-runner of the Internet will slowly but surely become obsolete.

2008 is going to be interesting. We will finally know if Google is allowed to buy DoubleClick. Online ad spend is projected to outgrow radio and with the help of the writer’s strike, may outgrow traditional media faster than originally predicted. Social networks will be put to the test as now all eyes are on every move and mistake. And two major events: the U.S. presidential election and the 2008 Beijing Summer Olympics will surge the web with new advertising opportunities, and new follies that will be written about. The prediction for ’08 is uncertain, but whether the industry bustles and explodes with wealth as everyone would like; or bursts and deflates as everyone predicts, there is sure to be a good story to tell.

Kevin Johnson, president of Microsoft’s online platform and service groups will oversee the heads of all three. Satya Nadella will be responsible for the search and ad-platform group, aQuantive CEO Brian McAndrews will be head of the advertiser and publisher solutions group and Steve Berkowitz leads the online services group in charge of audience.

There will now be two ad-sales groups that will be under McAndrews and Berkowitz. This year, Microsoft has a $40 billion online ad market and a $600 billion global ad market. McAndrews said, “We do intend to be a player as all media become digital, as has always been our vision.”

Avenue A|Razorfish will continue to operate independently of Microsoft. All businesses are headquartered in Seattle.

Over 58 million shares were voted into approval of the 79 million shares being bought for an 85% premium. Once closed, it will be the largest acquisition in Microsoft history, paying $66.50 a share for aQuantive.

aQuantive chairman NIck Hanauer spoke with P-I’s Bishop and stated that his concerns over the acquisition are over. “My early fears that Microsoft would bungle the integration have vanished. Clearly, they have done and are doing a spectacular job.”

Ad –serving company Atlas, ad network DRIVEpm, and ad agency Avenue A|Razorfish make up the three business divisions of aQuantive.

With this acquisition being completed, it is curious if Google and DoubleClick will enjoy the same kind of fate.

This deal will allow IAC to consolidate its varying publishers into a single “premium platform”. These publishers service about 60 million users a month.

President of IAC Advertising Solutions, Rich Stalzer said, “There were two key objectives that drove our partnership selection. One, we needed to consolidate IAC properties onto a single media ad serving platform so that advertisers could achieve reach and frequency efficiencies across IAC’s businesses. Two, we sought to create enhanced targeting capabilities for advertisers by effectively segmenting our extensive user base.”

Karl Siebrecht, Atlas president points out that the switch is only further proof that publishers are seeing the benefit in platforms that are evolving with the market. He said, “Unlike other ad serving platforms, Atlas Ad Manager brings enhanced flexibility, inventory forecasting and simplified third party integration to the table which will enable IAC to capitalize on the benefits from improved efficiency and better organization of inventory.”

The Hart-Scott-Rodino Antitrust Improvements Act requires companies proposing to merge to allow U.S. regulators up to 30 days to scrutinize the deal. Microsoft said the 30-day period has expired without a request by regulators for further information.

“We’re pleased the 30-day review period concluded without a second request,” said Microsoft spokesman Guy Esnouf. “We now think the transaction will be concluded by the end of the year if not considerably sooner.”

aQuantive has grown in the last decade into three main brands: Atlas, which makes the Media Console advertising platform; DRIVEpm, which provides ad services that match advertiser campaigns with publisher inventory; and Avenue A | Razorfish, which is one of the largest online ad agencies in the world and provides advertisers digital marketing consultation along with media planning and buying.

Microsoft has said since May that they planned to use the aQuantive assets to create next-generation advertising systems. Those systems include cross media planning, video-on-demand and IPTV. aQuantive will continue to operate from its Seattle headquarters as part of Microsoft’s Online Services Business.

Microsoft’s $6 billion acquisition of aQuantive and Yahoo!’s $680 million spending on the other 80% of Right Media it did not own are being investigated as well. This was first reported, ironically enough by another publication who is looking to be acquired, The Wall Street Journal.

The FTC has a system of review called the “Hart-Scott-Rodino” process. This is standard fare with every major acquisition. Traditionally, if given a “second request”, companies are required to provide more information for a more thorough investigation. It is rumored that Yahoo and Microsoft may be receiving these second requests since Google’s $3.1 billion bid for DoubleClick warranted such a step.

With such a fast growing market, large companies are eager to have their hands on valuable players in online advertising. However, the investigations have the important end goal of maintaining the competitive nature of this market. “Advertising on the internet is one of the fastest-growing sectors of marketplace promotion; therefore, ensuring its competitiveness is critical for all participants,” stated the American Association of Advertising Agencies and the Association of National Advertisers in a joint letter.

It is unclear whether or not there will be an investigation into the WPP Group’s acquisition of 24/7 Real Media. Also, it has not been elucidated whether or not the investigations will categorize these deals under all advertising or specifically the online, third-party display advertising market.

During a Q&A, McAndrews said that a deciding factor was the opportunity Microsoft would give aQuantive with technical and financial capital resources. This would allow the company to flourish.

“The key difference between digital and traditional media is technology,” he said. “We are aligning with the largest technology company in the world.”

Although McAndrews does not see an end to consolidation in sight, he does not think that signals an end to industry pioneering.

“We’re in the first or second inning of a long game here. There’s no monopoly on innovation,” he said. “I don’t think you’re going to see two or three big players and then game over. There will continue to be a broad range of companies.”

Being adopted by Microsoft gives aQuantive immediate access to many resources otherwise more costly to the company should they’ve attempted independent aquisition. Companies such as ScreenTonic, a mobile marketing firm, and Massive, an in-game advertising expert.

McAndrews assure that while there will be obvious changes to the company, Avenue A/Razorfish will be the least affected when the deal closes late this year.

Another perk of the aquisition are the global possibilities for aQuantive. “We are in the seven largest countries. We want to be in more,” said McAndrews.

Discussing their best-of-breed model he said, “We’ve put creatives and media planners side by side with software developers and the statisticians,” “They get along. It’s hard, but it’s more easily done with a best-of-breed model.”

In speaking about the fusion of advertising agencies and technology companies he claims the lines have been blurring for years, stating “That is the agency of the future. When all media are digital, we’re all digital agencies.”

He believes that this is true with traditional media as well, saying that TV is mirroring the Internet rather than vice versa.

“Distribution can trump destination,” he said. “I need to go where the audience is.” This is yet another reason Microsoft seemed to be such a good match.

McAndrews added that he does not anticipate any antitrust issues because Microsoft and aQuantive have different strengths to make up for the other’s weaknesses.

Two days after Google and DoubleClick had struck a deal, Microsoft General Counsel Brad Smith called for regulators to give the deal a hard look. On the Sunday following the announcement of the Google/DoubleClick merger, Microsoft’s General Counsel made the following statement:

Google has always welcomed the debate and has the advantage of the publics trust. Their whole business model has been based on an agreement of respect for the privacy of their users. It remains to be seen if this trust between Google and their users will remain intact after the FTC investigation runs its course.