Microsoft & Facebook Do Mating Dance As Microsoft Seeks Alternatives To Yahoo; Google Now Uncertain On Yahoo?

At one point or another, most of the big online media companies have talked about buying Facebook. Yahoo is rumored to have made an early offer of almost $1 billion for the company, which was (obviously) turned down. But as the MicroHoo discussions appeared to be deteriorating, Microsoft apparently made some formal inquiries about Facebook’s willingness to be acquired, according to the Wall Street Journal Also from the story, an unnamed source suggests Google execs are uncertain about going ahead with a deal to put their ads on Yahoo.

There are a number of people who believe that buying Facebook for $15 billion (its purported valuation) would be a foolish move for Microsoft. That price tag would make it the largest acquisition in Microsoft history by about $9 billion (aQuantive was $6 billion), but still less than a third of the proposed $47 billion that Microsoft was prepared to pay for Yahoo.

When Facebook Platform was first announced in May of last year with Microsoft as one of its inaugural partners, it immediately struck me that Microsoft would eventually acquire the social network. Then, when Microsoft made its $240 million investment, it seemed the company was moving on a path toward that eventual outcome.

There are very few, if any, companies beyond Microsoft with the cash or the willingness to pay $15 billion for Facebook — not even Google. Its only other recourse would be an IPO. While that might quickly elevate the top executives at the company to the Forbes’ billionaires list, becoming a public company presents many challenges for Facebook.

Google has said in the past that its ad relationship with social media sites (read: primarily MySpace) was not going as well as hoped. Indeed, Fox Interactive Media missed its revenue numbers yesterday. And, in general, social media sites do not make ad revenue as effectively as, say, search does.

Despite its dramatic growth in traffic and various efforts to date, Facebook has largely failed to become the effective advertising platform it envisioned itself as. The Wall Street Journal reports that roughly half the company’s ad revenues come from its partnership with Microsoft (ad revenues are projected to be $300 to $350 million this year). Currently it’s under-monetizing for its size. (I’ve argued that Facebook should put Microsoft’s Live Search box and related paid search advertising on the site, which would immediately help both it and Microsoft.)

Longer term Facebook CEO Mark Zuckerberg and company probably don’t want the pressure and scrutiny of being a public company. Zuckerberg has indicated he wants to keep Facebook “independent,” but this probably goes to the company’s ability to execute against a vision that he doesn’t want distorted by another’s strategic objectives. Yet becoming a public company would ironically do the same thing, given the market’s insatiable appetite for growth. And unless Facebook radically transforms, it probably cannot drive the revenue growth that would be required to maintain shareholder value over time.

I could be wrong; however, all this logically argues for Facebook to allow itself to be acquired by Microsoft.

Facebook could relatively easily transform into a next-generation portal and successor to Yahoo that would give Microsoft massive additional reach, but more importantly engagement.

Given the collapse of the Yahoo acquisition effort, Microsoft is not going to be able to go head to head with Google in search on the desktop absent some unforeseen development — at least in the near term. And while Facebook won’t “kill” Google, it could evolve into something that would reduce its users’ collective need to rely on Google, especially if Live Search comes to the site.

In my view, that’s why it makes sense for both parties — especially Facebook — to do a deal.

As for the Yahoo-Google ad deal, from the article:

Meanwhile, Yahoo continues to face challenges of its own. Google Inc. executives are now divided over whether to pursue a search-advertising deal with Yahoo, according to a person familiar with the matter.