Facebook/Microsoft Deal Analysis: Part 2

The Wall

The talk around many water coolers today is of the “incredible” or “crazy” deal that valued Facebook at $15 billion. Yes, $15 billion — for a three-year-old company that is just hitting cash flow positive on a mere $150 million in revenue. People ask, “Does this mean we are now formally in a Bubble again?”

My answer is, “No.” Why? Because Microsoft is Microsoft, not a VC firm. Microsoft couldn’t care less whether their investment valued Facebook at $1 billion or $100 billion, because this wasn’t a venture capital investment decision for them. It was a purchase, not of a piece of Facebook, but of a very unique and strategically important asset — the run of ad inventory on the Facebook network through 2011 (minus some portion reserved by Facebook), plus some undisclosed amount of access to user profile data essential for “social targeting” of the ads.

There is only one Facebook, and somebody was going to end up with the exclusive right to sell its ad inventory and leverage its user data. In the end, it came down to a question of which of the three big players needed it most — Microsoft, Google, or Yahoo. It is not at all surprising that once the bidding got high enough, Yahoo got priced out. Nor is it surprising that Google stayed in until the end, ensuring that if Microsoft had stronger need to win, it would have do so at the highest possible price.

For cash-rich Microsoft (they have over $20 billion on hand), this was not a terribly costly deal. For their $240 million, they get something that just might help them leapfrog Google in battle for supremacy in the huge and growing market of online advertising.

Oh, yeah. And one more thing. By agreeing to a deal that effectively values Facebook at $15 billion, they have made sure that neither Google nor Yahoo will buy the company. All in all, I’d say a very smart play by Microsoft, and a very well played hand by Facebook.

And, no, we are not in a Bubble.

To read what I think are the implications for others in the space, like Plaxo and LinkedIn, here’s a post I did yesterday

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2 thoughts on “Facebook/Microsoft Deal Analysis: Part 2

  1. […] really understand this deal, see Part 2 of my analysis, that explains what Microsoft actually paid […]

  2. techcrunchreader says:

    “because this wasn’t a venture capital investment decision for them.”

    Good analysis John, it makes sense to me too.

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