Microsoft Buys $240 Million Stake in Facebook

It was a two horse race between Google and Microsoft to determine who would buy a stake in Facebook and get the rights to broker Facebook's international ads. Today Microsoft won that race, purchasing a 1.6% stake in Facebook for $240 million. This is another move in Microsoft's strategy of regaining relevancy in the online advertising world after getting blindsided by Google in recent years. While this deal pales in comparison to the company's $6 billion purchase of aQuantive/Avenue A Razorfish it does signal that Microsoft is still willing to spend some of its $21 billion dollars of cash on key internet advertising assets.

This deal is also interesting because it gives us a real value for Facebook: $15 billion. Mark Zuckerberg probably has a big smile on his face right about now as he thinks back to the $1 billion offer he received from Yahoo about a year ago. Many thought Mark should have taken that offer, but obviously he's going to get the last laugh on this one. At $15 billion Facebook is bigger than the market capitalizations of Bear Stearns, H.J. Heinz and Baidu.com and is about the same size as Sempra Energy, Ameriprise Financial and Xerox.

To put all of this in perspective Sempra Energy has about $11.6 billion of revenue and roughly $1.1 billion of net income compared to Facebook's $150 million of revenue and $30 million of net income. Okay, okay I know comparing a technology company with a gas utilities company is comparing apples and oranges, but you must admit it is a sobering perspective. Before this deal I find it hard to imagine that Facebook had much more than $20-30 million of cash and Sempra has about $1.3 billion, but I digress . . .

The 100x multiple on trailing earnings may seem a little rich, but Facebook is also making huge gains on MySpace its chief competitor in the social networking space. It is also experiencing dramatic revenue growth, particularly from Canada and Asia. Even from a quick glance at Alexa the ground Facebook has made up is stunning. You may have to click the graph to really see it, but you can see how Facebook's daily reach as measured by Alexa has risen dramatically over the past year, gaining on Myspace all the while:
During September Facebook attracted 30.6 million US visitors to Myspace's 68.4 million. So although it is growing faster it still has some ground to make up. But, Facebook's control over the US market is not what excites investors. He's a blurb from a Wall Street Journal article that describes it well:

Facebook, a service that lets people set up their personal Web pages, is seen as the next big venue for placing online display ads. The company has nearly 50 million users, many of them the young audience that advertisers covet. In addition to selling ads on its own, the company over the past year has started placing ads through a deal it signed last year with Microsoft, under which Microsoft brokers banner ads on Facebook's U.S. site until 2011.

The deal signed today is an expansion of that agreement and focuses on international versions of the Facebook service, which Facebook is now starting to open. A deal with Microsoft would allow Facebook to shift some of the burden of selling international display ads to its larger partner. Microsoft in recent years has built up a large online advertising sales force and has invested in technologies to broker advertising over the Web.

By the end of this year, Asia will account for 35% of the world's social networking users, with 28% of users in Europe, the Middle East and Africa, 25% in North America, and 12% in the Caribbean and Latin America, according to research firm Datamonitor Plc.

It is that strong international growth, particularly in Asia that has investors giddy. I think if we have learned one thing at this point it is to not underestimate Mark Zuckerberg or Facebook. I think it is not beyond the realm of possibility to expect a Facebook IPO sometime in 2009.