Microsoft Dilemma: Facebook Or Yahoo (Or AOL)?

The NY Post is reporting that Microsoft is weighing two big investment options: buying a 5 percent stake in Facebook (at rougly $500 million), which was widely reported yesterday, or buying some or all of Yahoo. But the options are probably mutually exclusive, given the earlier $6 billion acquisition of aQuantive.

According to the article:

According to two sources familiar with the discussions, Microsoft has restarted talks with Facebook about a potential investment that would give the social networking Web site its sought-after $10 billion valuation.

At the same time, both sources said that internally Microsoft has been debating for months whether it should go public with the takeover proposal it made for Yahoo! earlier this year in an attempt to prod shareholders to force management to the bargaining table.

If Microsoft wants the Facebook stake (partly to preserve its advertising deal for the future), it has to act now. But it will probably have to wait for an opportunity to build support for a potential Yahoo investment or takeover. Yahoo doesn’t want to be acquired or have majority control in “outside” hands unless the markets force the company’s hand. However, in two more quarters we’ll likely see whether Yahoo will remain independent or be forced by shareholders to do some sort of deal.

And then there are persistent calls for an AOL sale or spin off. Microsoft was interested in AOL at one time and the company may still be an attractive target if TimeWarner decides to sell. Recall that Google invested $1 billion to preserve its relationship with the portal at a time when Microsoft was interested in making a similar investment.

Microsoft needs traffic and reach, and you can bet that it will make some sort of big investment in the next several months or year. The only question is, what will it be?