Microsoft Said to Consider a Stake in Facebook

Some people laughed at Mark E. Zuckerberg when he reportedly turned down a $900 million offer last year for Facebook, the social networking Web site he founded three and a half years ago.

Now, it may be Mr. Zuckerberg’s turn to laugh — all the way to the bank. Microsoft, Google and several funds are considering investments in the fast-growing site that could give the start-up a value of more than $10 billion, according to news reports.

While discussions are said to be in the early stages, Microsoft is reportedly considering an investment of $300 million to $500 million for a 5 percent stake of the company. And, according to The New York Times, Google is also interested in an investment.

Facebook’s valuation could go even higher as the two rivals create the kind of competitive bidding situation that has recently driven the acquisition prices of other start-ups into the stratosphere.

The Times said that Facebook is seeking a minimum valuation of $10 billion but interested bidders have apparently expressed a willingness to value it as high as $13 billion, on the assumption that, in the future, Facebook will become a powerful player in the online world.

But these numbers might have little basis in actual revenue or profit. Facebook is a private company and does not reveal its income. Earlier this year, a Pali Research analyst, Richard Greenfield, estimated that the company brought in $60 million to $96 million in annual revenue, with no real profit. Much of that revenue comes from a year-old advertising relationship with Microsoft, which places display advertisements on the site.

The Financial Times’s Lex column suggests that Microsoft is in a “serious quandary.” The software giant is under intense pressure to catch up with competitors in the online realm, and so it could end up paying an exorbitant price to preserve its ties with Facebook.

DealBook colleague Saul Hansell argues in The Times’ Bits blog that, for Microsoft, there seems to be little upside.

Facebook is only worth all that money if it becomes a significant platform for content and communications and that means it would rival Microsoft’s MSN/Windows Live platform, Yahoo and Google. If Mr. Zuckerberg succeeds, he will be free to ignore Microsoft, and sell Facebook to the public or to any Microsoft rival for that matter.

If he fails at building the company, Microsoft’s investment will look overpriced.

Breakingviews was also skeptical, saying that “even by the wacky metrics of Web 2.0, there’s no way the software giant can justify such profligacy.”

The amount, the publication noted, would amount to more than $200 per Facebook user — well above the $70 that Google put on YouTube’s individual eyeballs or $50 that Ebay paid for each of Skype’s earlobes.

But Mr. Greenfield told The Times the investment price that Microsoft was considering might have more to do with keeping the prize out of the hands of its powerful rivals. “There may be competitive reasons to be connected to this asset beyond what the specific valuation is today,” he told The Times. “You may be paying a premium to keep others out.”

The lack of a track record for Facebook might actually be driving the price up. “Trying to delineate a value today of what was a new industry five years ago is challenging right now,” Mr. Greenfield said.

The Times noted that there may also be be personal reasons that Facebook would align itself with Microsoft, according to The Times. Mr. Zuckerberg has a personal friendship with Ray Ozzie, Microsoft’s chief software architect and one of the people stepping in for Bill Gates, the co-founder who is giving up his day-to-day responsibilities at the company.

Also, Jim Breyer, a managing partner at the venture capital firm of Accel Partners and one of three Facebook board members, was an investor in Groove Networks, Mr. Ozzie’s company, which Microsoft purchased in 2005.

The investment discussions by Facebook are part of its effort to raise an additional round of capital to further the company’s growth and build on its current momentum. The company has solicited interest not only from Internet companies but also from a handful of financial players including venture capitalists, hedge funds and private equity firms, according to people with knowledge of its plans.

Last September, Yahoo was in acquisition talks with Facebook. It reportedly offered $900 million to buy the site outright and was rebuffed by Mr. Zuckerberg, the 23-year-old chief executive, who has said that he was determined to keep the company independent and take it public through an initial public offering.

Now, Google and Microsoft are jockeying for a stake in a social networking site that is said to be creating a new way for Internet users to meet people and interact with friends on the Web.

In May, Facebook redefined itself as a platform, allowing other companies to create features like games, photo-sharing tools and music players that run in Facebook.

That strategy, just four months old, has unleashed a flood of interest in the company, with thousands of independent software developers creating a range of programs for the service.

“We have this situation where every developer worth his salt here in Silicon Valley seems to be working on a Facebook application,” Charlene Li, an analyst at Forrester Research, told The Times.

Facebook is full of activities, from the goofy, like “biting” friends with a virtual vampire, to the more utilitarian, like seeing what parties and events Facebook friends are attending. There are more than 4,000 third-party applications on Facebook, the company said.

The strategy has drawn plenty of attention and new users to the site. Facebook has more than 40 million members, up from 9 million last year.
Source : http://dealbook.blogs.nytimes.com