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Microsoft Corp.'s $240 million investment in Facebook Inc. and the social networking company's soaring valuation highlight different but interconnected trends in technology today: The Internet effectively serves as the digital world's "operating system," a development that puts the software titan at risk of being left behind. Microsoft announced Wednesday afternoon that it had purchased a 1.6% stake in the social networking company, which values Facebook at $15 billion--100 times its anticipated revenues for 2007. Facebook was able to secure such a rich price tag by pitting Microsoft against rival Google Inc. and, to a lesser extent, Yahoo! Inc. Rumors circulated Thursday that two undisclosed hedge funds would also participate in the financing, providing Facebook with an additional $500 million. "This is a very strategic move for Microsoft," said Bill Burnham, managing general partner with Menlo Park, Calif., hedge fund Inductive Capital LP. "They're drawing a line in the sand against Google, and trying to remind people they are still one of the biggest, baddest boys on the block." Indeed, after losing out to Google on the acquisitions of video sharing Web site YouTube last year (for $1.65 billion) and online advertising firm DoubleClick earlier this year ($3.1 billion), and on a high-profile advertising partnership with News Corp.-owned social networking site MySpace.com, Redmond, Wash.-based Microsoft was desperate for a win. That is, at least as desperate as a company with a $300 billion market cap and $21 billion in cash in the bank can be. "Google has had Microsoft on the defensive the past few years, and Microsoft has been reactionary--Google buys DoubleClick so Microsoft buys aQuantive," Burnham said, referring to the company's $6 billion online advertising acquisition. "I think the Microsoft guys are getting on the offensive a little bit. Maybe this is one of the moves they're going to make to turn the tide rather than responding to what Google's doing." Though he would not comment about the Microsoft investment in Palo Alto, Calif.-based Facebook, Google CEO Eric Schmidt did touch on the lofty valuations seen in the sector during the company's analyst day on Wednesday. "Overbidding has been a constant since I've been with the company," he said. "We deal with it all the time. It always upsets me, [but Google co-founder] Sergey [Brin] calms me down." Still, companies will need to demonstrate their worthiness in order to get the Big 3 involved in a bidding war. Ashkan Karbasfrooshan, president of WatchMojo.com, a blog that covers advertising, finance and technology, said there are a few companies that would command significant valuations in a sale. Among them are online advertising firm ValueClick Inc., which has been labeled a takeover target since the consolidation in the online advertising space began in earnest earlier this year. He also cited privately held digital advertising firm Tribal Fusion Inc. and business networking site LinkedIn Corp. as acquisition candidates. While there may be few properties that had the kind of negotiating leverage Facebook had, the Microsoft investment will have ripple effects throughout the Internet sector. In a research note put out following the Facebook announcement, Merriman Curhan Ford & Co. analyst Richard Fetyko said both the investment and acquisition of aQuantive show Microsoft is betting big on the growth in online advertising, "and places a whole new valuation framework on online destination Web sites" like financial site TheStreet.com Inc., technology content provider SourceForge Inc., bridal Web site Knot Inc. and consumer banking Web site Bankrate Inc., as well as the upcoming initial public offering of Classmates Online Inc. But the company likely to derive the most benefit from Facebook's valuation is MySpace. New York-based News Corp. acquired the social networking site for $580 million in 2005 "If you're saying Facebook is worth $15 billion, you have to be wondering how much MySpace is worth on the open market," said Burnham. "While Facebook is doing incredibly well and growing quickly, MySpace is still bigger." According to comScore Media Metrix, Fox Interactive Media, which includes MySpace, had roughly 68.5 million unique visitors in September, more than double Facebook's 30.6 million unique visitors. But many industry experts said Facebook could eventually surpass MySpace. ComScore numbers show that while Facebook was the 16th most visited Internet property in the U.S. in September, it got sixth place in traffic. News Corp. could spin out its Internet assets in an IPO and tap into what surely would be an enthusiastic investor base, Burnham said, particularly if it went public before Facebook. He also said News Corp. is unlikely to sell the property, since it probably could get a better valuation for the assets in a public offering, but that it could also seek a closer alliance with Google.  Deal Video
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