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Microsoft invests $240 million in Facebook

Rapidly rising Internet star Facebook Inc. has sold a 1.6 percent stake to Microsoft Corp. for $240 million, spurning a competing offer from online search leader Google Inc.
/ Source: The Associated Press

Rapidly rising Internet star Facebook Inc. has sold a 1.6 percent stake to Microsoft Corp. for $240 million, spurning a competing offer from online search leader Google Inc.

Culminating weeks of negotiations, the investment announced Wednesday values Palo Alto-based Facebook at $15 billion — a stunning figure for an online hangout started in a Harvard University dorm room less than four years ago.

Microsoft also will sell Internet ads for Facebook as the site expands outside the United States, broadening a marketing relationship that began last year.

“This is a strong statement of confidence in this partnership and in Facebook,” Kevin Johnson, president of Microsoft’s platforms and services division, said during a Wednesday conference call with reporters and analysts.

Besides validating founder Mark Zuckerberg’s decision to rebuff a $1 billion takeover offer from Yahoo Inc. last year, Microsoft’s money should be more than enough to pay for Facebook’s ambitious expansion plans until the privately held company goes public.

Zuckerberg, 23, has indicated he would like to hold off on an initial public offering for at least two more years. In the meantime, Facebook hopes to become an advertising magnet by substantially increasing its current worldwide audience of nearly 50 million active users, who connect with friends on the site through messaging, photo-sharing and other tools it offers.

Although News Corp.’s remains the largest social network, Facebook has been growing much faster the past year.

Facebook attracted 30.6 million U.S. visitors during September compared with 68.4 million at MySpace. Microsoft’s entry in the social networking arena — “Windows Live Spaces” — attracted 9.8 million U.S. visitors, according to comScore Inc.

To support its growth, Facebook is gearing up to more than double its payroll during the next year to about 700 employees. The company currently employs about 300 workers with annual revenue believed to fall between $100 million and $150 million.

The Facebook investment represents a coup for Microsoft because it strengthen for several years as it watched Google deepen its dominance of the space.

During its fiscal year, ending in June, Microsoft’s online ad revenue rose 21 percent to $1.84 billion. Over the same period, Google’s ad revenue soared 64 percent to $13.3 billion.

Microsoft also appears interested in Facebook’s success with “widgets” — the interactive capsules that offer applications available on other Web sites. Outside developers have created about 8,000 widgets since Facebook began soliciting the contributions in May.

Johnson said Microsoft plans to work with Facebook in areas besides advertising but declined to elaborate.

With the Facebook investment, Microsoft dealt a rare setback to Google, which trumped its rival in earlier bidding battles involving a stake in AOL and ownership of online video sharing pioneer YouTube and Internet ad service DoubleClick Inc.

Microsoft couldn’t afford to lose the tug-of-war for the Facebook investment and advertising alliance, said Gartner analyst Allen Weiner.

“This was a muscle-in from Microsoft,” Weiner said. “It would have been a nice-to-have for Google, but it was certainly not essential.”

Facebook also felt more comfortable about working with Microsoft because Google has made no secret about its interest in building a more formidable social network of its own. Google’s current social network, called Orkut, has had relatively little success outside South America.

Owen Van Natta, Facebook’s chief revenue officer, said the company talked to several suitors before settling on Microsoft. He declined to provide further details.

Microsoft’s successful courtship of Facebook shows the 32-year-old company is becoming more savvy about the Internet, said Matt Rosoff, an analyst for the research group Directions on Microsoft.

“I think they understand it now and they’re proceeding correctly,” Rosoff said. “Two years ago, I would have said they don’t get it at all.”

Tim Armstrong, who oversees Google’s North American advertising, declined to comment on the Facebook negotiations during a meeting with analysts Wednesday at the company’s Mountain View headquarters.

“We have tremendous respect for them,” Armstrong said of Facebook.