“Independent of financial suitors, Facebook is reportedly developing its own advertising system that will target ads based on users’ profile information.”
San Francisco — Microsoft Corp. is negotiating to acquire as much as 5% stake of “Facebook,” in a deal that could value the fast-growing online social network company at $10 billion or more, for a price between $300 and $500 million, according to a report published Monday in the Wall Street Journal.
Citing unnamed people familiar with the matter, The Wall Street Journal said Microsoft — the world’s largest software company is holding preliminary discussions that could culminate in a $300 million to $500 million investment in Facebook, a Palo Alto social-networking site founded just 3 1/2 years ago.
In exchange for the money, Redmond, Wash.-based Microsoft would receive up to a 5 percent stake in privately held Facebook, which has previously raised nearly $41 million from venture capitalists and other individual investors.
The move could give maturing Microsoft more access to young users and let Facebook get closer to a major software maker at a time when its growth is increasingly tied to a proliferation of small applications from independent developers on its site.
The talks could also lead to a showdown with Microsoft’s rival, Google, which is also keen to invest in Facebook, the Wall Street Journal says.
Spokespeople with Facebook, Microsoft, and Google declined to comment, branding the report as “rumor and speculation.”
Facebook, which already has an advertising relationship with Microsoft, would benefit from closer ties with developers as it seeks to turn its site into a full-fledged Web platform where users can play games, interact and read news about each other, said Forrester analyst Charlene Li.
“We think it is likely that Microsoft would be considering an investment in Facebook given their existing relationship and the strong growth potential of that market,” said Andy Miedler from the US brokerage Edward Jones.
Such a deal could help Microsoft better compete against Web search leader Google Inc. for a growing base of online advertising and put one of the Internet’s hottest names in Microsoft’s camp.
“If you are building a business around building a platform there is one company that has done it better than anybody else — and that is Microsoft,” Li said. “People have been just assuming that Google would be the best partner and that is not necessarily the case.”
“Redmond, Washington-based Microsoft already has an exclusive agreement until 2011 to broker display advertisements for Facebook.” The Journal said Microsoft and Facebook are discussing expanding that agreement beyond the United States.
“A previously published Wall Street Journal report claims that Facebook is on track to generate $30 million in profit this year from $150 million in revenue, about half of which comes from display ads provided by Microsoft.”
“With more than $100 million in annual revenue, Facebook is believed to be a prime candidate for an initial public offering of stock next year or in 2009.”
Even as it entertains offers from Google, Microsoft, and potentially other online ad companies, Facebook is reportedly developing its own advertising system that will target ads based on users’ profile information.
Facebook, led by its 23-year-old founder and Chief Executive Mark Zuckerberg, is considering raising funds up to $500 million in cash from venture capitalists to help expand its current payroll of roughly 300 employees and finance other parts of its ambitious expansion plans, may insist on a valuation as high as “$15 billion,” according to the Journal.
“Thus, under the current state of affairs, an outright sale of Facebook is considered unlikely. Zuckerberg has repeatedly expressed his desire to remain independent. He rejected a $1 billion acquisition offer from Yahoo Inc. last year.”
“More than 40 million people use Facebook to set up personal web pages and communicate with each other.”
Facebook has grown to 39 million members, up nearly 63 percent from 24 million in late May, and is quickly gaining ground on larger rival MySpace, which was taken over by News Corp. in 2005 for what is now seen as a bargain price of $580 million. MySpace has more than 200 million users.
If Facebook’s talks with Microsoft heat up, it could draw online search leader Google Inc. to the negotiating table, too.
“Google would love to keep it out of the hands of Microsoft or at least drive up the price,” said Forrester Research analyst Josh Bernoff.
Two years ago, Microsoft and Google vied against each other to buy a 5 percent stake in Time Warner Inc.’s AOL, with Google ultimately prevailing by agreeing to invest $1 billion into the company as part of a wide-ranging advertising partnership.
“Since then, the price of eyeballs has risen. A year ago, Yahoo reportedly offered $1 billion to acquire all of Facebook and was turned down.”
After relinquishing an early advantage in the lucrative paid search market to Google and Yahoo Inc., Microsoft is trying to catch up by clinching deals to broker display advertising to some of the leading names in “Web 2.0.”
Yahoo and Google are also maneuvering. Having been rebuffed by Facebook, Yahoo is testing a new social service called “Mash” and recently struck a deal to deliver ads in England and Ireland to the social network “Bebo.”
Web 2.0 is a catch-phrase for a new generation of Internet services that run on interactive software and typically rely on content generated by users to attract more visitors. Microsoft also has an agreement with popular news site Digg.com.
Already a popular online hangout among teens and adults, Facebook has broadened its appeal during the past year by allowing people of all ages to set up personal profiles on the site and making it easier for other Internet companies to run their applications on its users’ pages.
“It would probably be pretty good for Microsoft since it has not had the best success in creating really hip, young-people-grabbing stuff on the Web,” said Kim Caughey, a senior analyst at Fort Pitt Capital Group, which oversees more than $1 billion, including Microsoft shares, for clients.
“Meanwhile, the blogosphere is buzzing with speculation that Google plans to introduce new social networking products later this year.”
“We are always looking for new ways to help our users connect with each other, share information, and express themselves, but we do not have any new details to share at this time,” Google said in a statement provided Monday.