Microsoft pays $240m to clinch stake in Facebook

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The Independent Online

Facebook, the social networking website founded by a university student less than four years ago, is worth $15bn (£7.3bn) according to the terms of a new deal between the company and Microsoft.

Microsoft is paying $240m for a small equity stake in the company, as part of an expanded agreement to sell adverts that appear alongside users' profiles on Facebook. Lured by the promise of increasing profits to be made from a business adding 200,000 new users a day, Micro-soft had battled with Google and others to win the deal.

Microsoft already has an agree-ment to sell adverts for Facebook in the US, which runs until 2011, and last night's announcement extends that relationship to cover the rest of the world.

No terms of the deal were announced, except that the investment by Microsoft will give it a 1.6 per cent shareholding, and give Facebook a valuation of $15bn, barely a year after it turned down takeover offers pitched at just $1bn. The social networking site did not say if any other new investors will be coming on board at the same time and at the same price as Microsoft.

Kevin Johnson, head of platforms and services at Microsoft, said: "The opportunity to further collaborate as advertising partners is a big reason we have decided to take an equity stake, and is a strong statement of our confidence in the long-term economics of this partnership."

Facebook is expected to make a profit of just $30m this year, but it is expanding fast. The majority of its 50 million users signed up in the past few months, and businesses are shifting their marketing budgets from traditional media to the internet so that $80bn is expected to be spent annually on online ads by 2010. Microsoft executives, taking questions from Wall Street analysts, said it was possible to imagine Facebook expanding to 200 million or 300 million users, and it would take only a modest amount of revenue per user to justify the price tag.

By agreeing to the valuation, though, Microsoft has swallowed the doubts of its chief executive Steve Ballmer, who said this month that there was "a faddish nature" to the explosion of social networking sites. The bidding war for the Facebook deal reprises a contest that Microsoft lost against Google for the right to place ads on the rival site MySpace.

Analysts have been concerned that Microsoft will overpay for deals simply to reinforce its share of the online advertising market, and some expressed incredulity at the $15bn price tag. "The only way this works is if Facebook becomes sort of the users' operating system on the internet," said Morningstar's Toan Tran, "and everyone logs into Facebook every day to get in contact with their friends and use a multitude of future applications that will be developed for it."