Microsoft Is in Talks To Buy Facebook Stake

WSJ:

Microsoft Corp. is in talks with Facebook Inc. about making an
investment in the social-networking startup that could value Facebook
at $10 billion or more, according to people familiar with the matter.

The talks set up another likely face-off between tech titans: Google
Inc. has also expressed strong interest in a possible Facebook
investment, said people familiar with the matter.

Microsoft's approach to Facebook in recent weeks with proposals to
invest in the fast-growing site is part of the software giant's effort
to catch up with the Internet rival Google. If successful, Microsoft's
talks with Facebook could give it an up-to-5% stake in the
closely-held startup -- a stake potentially valued at roughly $300
million to $500 million, the people familiar with those talks said.

The people familiar with the matter said that the discussions are
still preliminary and Facebook could wind up not taking an investment
from either Microsoft or Google. Factors in the discussions include
the valuation the suitors would offer to Facebook and other business
considerations they could contribute to sweeten any deal.

A Facebook spokeswoman and spokesmen for Microsoft and Google declined
to comment.

Facebook, which is used by over 40 million people to set up their own
personal Web pages, to communicate with each other and to share photos
and videos, has emerged as the poster child for the latest Internet
wave. The company expects this year to have a profit of $30 million on
revenue of $150 million, according to people familiar with the matter.
Based on that, a $10 billion valuation for the company is sky-high.
But an investment in Facebook could give Microsoft or Google greater
opportunities to tie their services in with Facebook at a time when
they've both recognized that social networking is changing how
consumers tap into their core activities, such as Web search and
email.

The Facebook approach is also part of Microsoft's urgent attempt to
strengthen its ad "platform," which lets advertisers automatically
place ads on Web sites and on Microsoft's Internet search engine.

Microsoft's platform strategy isn't unique: Google and Yahoo Inc. are
also racing to establish their platforms as the broker of choice for
hundreds of thousands of advertisers on millions of Web sites. That
approach has taken on urgency as users and advertisers increasingly
spend time and dollars on sites besides the big, established Web
portals. Facebook itself is working on an ad platform that would let
marketers target users with ads based on their personal information,
using an automated Web-based system, according to people familiar with
the matter.
[Mark Zuckerberg]

Microsoft and Facebook may also expand an exclusive agreement signed
last year under which Microsoft serves display ads to Facebook,
according to a person familiar with the matter. The existing deal is
expected to bring in about $75 million for Facebook this year and a
total of at least $200 million to $300 million through 2011, say
people familiar with the matter. The actual numbers will depend on
Facebook's traffic growth and other factors, these people say. That
existing agreement covers only the U.S. and expires in 2011, but the
companies are discussing whether to extend it for a longer period and
expand it beyond the U.S., this person said. This person said that
Facebook has also discussed possible ad relationships with Google,
though the existing Microsoft agreement limits the options.

Facebook, meanwhile, is considering raising as much as $500 million in
cash that could be used for acquisitions, investing in computer
infrastructure and adding to its roughly 300-person headcount, said
the people familiar with the company.

Facebook has indicated that it might hold out for a higher valuation –
as much as $15 billion – than Microsoft is willing to agree on, the
people said. Such a move could attach a high value to any Facebook
pre-IPO shares it would use in acquisitions, to its advantage.

Facebook is also considering raising funds from financial investors,
in addition to or instead of an investment from a strategic investor
like Microsoft or Google, one person said. The company has so far
raised about $40.7 million from venture-capital firms including
Founders Fund, Accel Partners and Greylock Partners.

Microsoft has considered trying to buy the company outright, but
people familiar with the matter said it's unlikely at this time.
Facebook founder Mark Zuckerberg has steadfastly kept his company
independent with the goal of eventually taking the company public. In
a round of negotiations last year, Mr. Zuckerberg rebuffed acquisition
approaches from Microsoft, Yahoo and others.