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Three Reasons Microsoft Paid So 'Little' For Facebook
An anonymous reader writes "Microsoft's $240 million investment is much smaller than the rumored $750 million that Facebook sought. Why the difference? Wired Epicenter's Terrence Russell analyzes the deal, and points out three good reasons why Microsoft got a 'bargain'. 'Microsoft Only Needs an Entrenched Position - Ballmer's plan to acquire 100 startups in 5 years is still sketchy, but we got the point -- Microsoft wants momentum. If the company is to go forward as planned then taking a small, strategic piece of Facebook makes sense. Microsoft's financial interests in Facebook's ad platform already exist, so it only makes sense to strengthen that tie as the hype builds.'"
This was more sneaky than some people think. They only had to spend $240 million to create such a stratospheric valuation that no one else would be stupid enough to buy at that price.
If people say "Facebook's the flavor of the month and it's never going to warrant a $15 billion value because the next flavor of the month will come along and steal its thunder," then Microsoft wins because Facebook can never find other investors at that valuation. That creates a cascade effect of investor avoidance, forcing Facebook's actual value down to where it's reasonable and Microsoft can snatch it up at a bargain.
If, on the other hand, people drink the Kool Aid and start pumping up the price of Facebook, Microsoft can sell out its interest at a profit.
I'm thinking the answer is the first possibility... they put Facebook's value at $15 billion to discourage others from investing in Facebook and make Facebook beholden to them.
Start a happiness pandemic
Simple really.
The simple truth is that interstellar distances will not fit into the human imagination
- Douglas Adams
Facebook is close to reaching "jumped the shark" status. I worry that Microsoft dumped a ton of cash into Facebook just like News Corp did for MySpace. As News Corp ramped up ads on the MySpace platform, people defected in droves to Facebook. What happens if history repeats themselves? That's right. People end up on Twitter (owned by Google), and Google didn't have to shell out a quarter of a billion dollars in the end.
No-one in TFA is claiming that Microsoft should have paid more for the 1.6% share it bought. It's suggested that it could've sticked to the same overall valuation and paid $750 million for a 5% stake. It's still the same price, it's just that they bought too little. And that seems a fair question that does not deserve the scare quotes.
Ballmer's plan to acquire 100 startups in 5 years is still sketchy
What kind of a plan is that? No wonder Microsoft is losing its way.
Compare and contrast with the business plan of Steve Jobs, which I think can be summed up as "make great products"...
I'm reminded of an editorial comic where someone creates a personal website for his cat and gets 10 million dollars in investment because he's visionary -- in effect, it's a parody of the .com bubble -- which Microsoft will fund.
I need to get cracking if I'm to get my $240 million...
A feeling of having made the same mistake before: Deja Foobar
Well, if they do THAT, then I think Google's owners will DEFINITELY buy F/B at $500MM, JUST to make sure they have controlling interest. Then, they even FURTHER drive down the valuation, then buy out mshaft's share.
Y/N/M?
Previously: "Linux... Toward the Sunrise..." Now: "Linux... Toward the-- No, now, part of Every Sunrise"
I was on facebook for kicks and I quickly realized it's full of little kids and their horrible grammar. In every group I joined [from singles groups to music/piano player groups] there was a continual barrage of horribly misspelled postings, lots of retarded "lols" and all that jazz. Nobody takes any of the serious chatter serious, and the fun chatter is just asinine like "join this group to keep facebook alive!" or whatever.
Frankly, if you're not a moron, or some attention whoring pre-schooler, I don't see why people would care about it. Not like the "friends" you have online map to anything realistic in the "real world." And no, joining the "let's keep facebook!" group won't influence whether facebook is alive and kicking or not.
Tom
Someday, I'll have a real sig.
Microsoft needs to get Silverlight out there. $240 million to Facebook is the cheapest method of getting hundreds of millions to install and use it, willingly.
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This is just a bribe to make sure Facebook does not use any portable technology or make it easy for competition to write applications/search on top of Facebook. Like the money it paid to large domain registrars to get them to switch away from Apache.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
Never ascribe to malice what can adequately be explained by incompetence.
Microsoft corollary: Unless it's Microsoft then never ascribed to incompetence or bad management what can adequately explained by pure unrelenting evil.
"There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy."
To create a fake value for Facebook, thereby making them a less attractive company to try and buy and at the same time prep'ing them for a market listing and an SEC criminal investigation.
It cost Microsoft nothing, they would just trade a % of the ad sales in exchange for the flat fee. Facebook got their ridiculous valuation and SEC watches and waits for them to try a listing on the back of it.
Where do you want to go today? Jail?
Man #1 - MS wants to buy 100 startups? Maybe they will buy a couple that can show them how an OS is supposed to work?
/. shirt) Imagine a beawolf cluster of 100 companies........
Man #2 - Redacted, turned out to actually be a woman
Man #3 - Wasn't this the MS business plan since way back in the early 90s? This is news?
Man #4 - (claiming to be spouse of man #2) Is there really 100 startups worth buying? I thought the venture capitalists were becoming a bit put off on the whole tech thing?
Man #5 - (throws a chair) MS will buy 100 startups if they have to secretly pay those companies to start up... MS will kill the competition in the buying startups sector!!
Man #6 - Will they support iTunes?
Man #7 - (dubiously wearing a
Man #8 - Shouts "Sorry, have to run and go start a company......"
Seriously, 100 startups? Why not 49? Why not 'as many as it takes'... what is the deal with 100? Microsoft begins with an M, why not 1000 startups?
Support NYCountryLawyer RIAA vs People
Absolutely correct. Not only will others potentially stay away, but it poisons Facebook themselves and creates a strong risk of complete implosion, which MS can use for leverage. Once a line is drawn in the sand, it engages the ego and creates strong psychological need to hold it, and if it starts slipping, it could exacerbate a dramatic downward spiral.
I don't think MS is that interested in Facebook beyond making sure that it has control over some "uppety" talk about platforms and OSes. It has its hands full with Google on the platform side of things, and I think they aren't intimidated by Facebook because they can basically manipulate them.
That said, Facebook is a toy. There is nothing about it that has anything to do with productive work. It's *maybe* 3-10 times more valuable than Hot or Not, that's about it.
MS got a huge bargain, getting a tremendous amount of influence for practically nothing for them. It's an extremely cheap hedge.
Balmer: $750 million dollars?? ****Agrrrrahhahahhahahah***** (throws chair)
Facebook: Ok $240 million could do nicely as well.
240 million should be more then enough to 1) make sure they only us M$ software 2) Cause mass confusion. reducing company productivity employee satisfaction and management decision making. (this reduces value and allows a higher percentage to be purchased for less in 1 year) 3) at some later date make the site slightly incompatible with competing products. 4) start charging users to essentially view M$ ads
Err.. as soon as the value drops down, people will grab it up. I seriously doubt overpaying for a slice of the pie is somehow going to make people *less* interested in facebook.
MABASPLOOM!
Microsoft paid for its part, as if facebook worth 15 Billion DOLLARS!! Do you really think they worth more then that?
If so, you should wake up from your dreams, and the internet bubble is growing and growing again, it might explode again, be careful.
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!!!
Next on the list is pets.com
what's Facebook? :-)
"Microsoft's $240 million investment is much smaller than the rumored $750 million that Facebook sought. Why the difference?
Umm. Common sense?
Somehow along the way I made a bad choice in life and now must live with 0 Karma.
What the hell is that article talking about? He states it as if MS didn't buy into that junk about a $15Billion valuation.
But, that's exactly what they did do. They paid $250Million for a 1.6% stake in the company. That means it values the whole company at $15.6Billion.
If they had negotiated it down, and got maybe 20% of the company for $500M. Then, they wouldn't have bought into the valuation.. that would have said it's worth $2.5B.
But, the math says MS thinks Facebook is worth $15Billion. I think that's ludicrous. But, then again, the first time I ever went to their site was today. So, I guess I don't really "get" the magic..
A significant vote at stockholder meetings?
To me 1.6% does not signify any 'controlling' percentage, maybe gadfly status...
"Enjoy what you're doing! If it becomes drudgery, you're doing it wrong!" - Jim Butterfield
BG: Your Internet ad was brought to my attention, but I can't figure out what, if anything, Compuglobalhypermeganet does, so rather than risk competing with you, I've decided simply to buy you out.
H: I reluctantly accept your proposal!
BG: Well everyone always does. Buy 'em out, boys!
H: Hey, what the hell's going on!
BG: Oh, I didn't get rich by writing a lot of checks!
So... Who's with me!!!
Deleted
Well, we know how this will go. First M$ invests in them, and they start to suck. G'bye Facebook!
I think a perfect settlement would have been for Microsoft to continue business as normal and innovate all they want, the only restriction being that they not be allowed to buy any more companies. If they are this magnificent well of innovation and ideas, go ahead, show us. 8 years later, with effectively no penalties actually imposed on this company, the best they come up with is a plan to buy 100 web companies in the next 5 years.
What innovations have we had from Microsoft in the last 8 years?
Prior to that we have web based email (HotMail), web browsers,
-USR1
Just as Facebook and Myspace we have had an enormous community here in sweden called Lunarstorm. At the beginning it was like everyone on the net went there but slowly as the kidz started to come people went away doing other more grown up stuff. It wasnt fun anymore when you had 30 people a day only out to make connections for bragging points or attention whores that idd anything to get many hits on their page. In Sweden grownups arent there anymore, just kids with not much money to spend. Not someplace i would want to put ads unless i was targeting young kids and selling very cheap goods like ringtones and music.
HTTP/1.1 400
I was just reading the Globe and Mail, Canada's most prestigious newspaper, and they had a slightly different take. Facebook was in the drivers seat and forced Microsoft to pay more for less. Google didn't need Facebook, but Microsoft did. http://www.reportonbusiness.com/servlet/story/RTGAM.20071024.wmicrosoftstaff1024/BNStory/Business/home
that money would've been much better spent in making their products as good as/better than the competitions to give consumers more incentive to not defect.
Not all conservatives are stupid,
but it is true that most stupid people are conservative.
- Hume
A good one. Your ORIGINAL post was slightly INCOHERENT and it took ME a FEW goes to UNDERSTAND what you were RAMBLING about. It just read badly and it wasnt of the quality to be a +2 post. While personally I would have modded it overrated (although I tend not to down mod if I can help it) rather than troll to knock it to +1, I would definately slapped a troll on your next post if I had mod points. Just take it like a man and next time hit the preview button and give it a little read through before you submit.
:)
Also if everybody avoided rating peoples comments, well that would kinda screw any mod system
Yes, but how much do you want to bet that Microsoft has some sneaky stuff in the sale contract that prevents FaceBook from selling at a lower price without Microsoft's permission because said sale would diminish the value of Microsoft's investment?
Start a happiness pandemic
"Ballmer's plan to acquire 100 startups in 5 years is still sketchy"
What kind of a plan is that? No wonder Microsoft is losing its way. Compare and contrast with the business plan of Steve Jobs, which I think can be summed up as "make great products"...
Microsoft has been buying things for decades and has about 90% marketshare. Apple has made great products for decades and has around 5% marketshare. Apple has had great success with new products in the past (Apple II, Mac) only to eventually lose the market to inferior products (IBM PC, Windows). It's premature to claim Apple's strategy superior, history shows otherwise.
tomorrow ? and they can do it too.
Read radical news here
I've posted this before and I suppose few people believe it but rate of growth in the social networking sites has TOPPED OUT. Growth is declining. Once a product passes through its growth inflection point, its potential changes from "infinite" to "bounded".
The boundaries for $$$ in social networking have been roughly established over the past 18 months. Maybe somebody at Microsoft actually has MBA knowledge, did the numbers and figured this out instead buying into hype.
http://www.realmeme.com/roller/page/realmeme/?entry=social_networking_meme_verified
Of course, what do I know? I'm just an old guy that doesn't bother memorizing java syntax anymore.
davidyes=pwned
When I heard that MS had an interest in Facebook I promptly attempted to delete my account. There is no way to do it. But I can deactivate it and that is what I did. Let me say that I will go out of my way to avoid using anything that Steve Ballmer has his fat chubby little hands into. If there are enough MS haters around this will give Facebook a good kick in the pants. If not I at least have the satisfaction that I am not part of the problem.
Linux Rules, Macintosh Rocks, what's Wintel?
then Microsoft wins because Facebook can never find other investors at that valuation. That creates a cascade effect of investor avoidance, forcing Facebook's actual value down to where it's reasonable and Microsoft can snatch it up at a bargain.
This is such a lame theory, it's not even wrong. Explain to me why these other investors -- who you say are turned off by FB's high valuation -- won't become interested again when the valuation falls?
And exactly what do you mean when you say "forcing Facebook's actual value down". You do understand they are a private company? Their valuation is nothing more than what is implied by the investments they (a majority of their equity holders) negotiate and agree to. If they decide they need more capital to finance growth, they can always solicit future investment that values their company at $2B, or any other number. There is no sense in which they're beholden to Microsoft as a result of this. There are many, many players who can invest these quantities of cash.
The real truth here is that Microsoft was willing to stomach an overvalued investment in order to buy the pageviews they desperately need if they are to ever catch up to Google in advertising. When your own web properties suck and don't deliver enough eyeballs, this is what you resort to.
As another said, your original post was...odd. Not that I'd mod it down for that. Try to use real words.
then I could tell all my friends to come on MyFace
If people say "Facebook's the flavor of the month and it's never going to warrant a $15 billion value because the next flavor of the month will come along and steal its thunder," then Microsoft wins because Facebook can never find other investors at that valuation. That creates a cascade effect of investor avoidance, forcing Facebook's actual value down to where it's reasonable and Microsoft can snatch it up at a bargain.
Actually if I could I'd be tempted to invest in Facebook. MS only got a 1.6% stake in Facebook, Google can afford to pay 5$500M for 3%. When one investor puts that much into an investment it makes it easier for others to invest as well, money follows money.
FalconShould there be a Law?
Okay time to ban Facebook! I'm going to stop using hotmail as well.
Go shove your operating systems up your ass Microsoft. We hate furiously
hate your piece of shit of an operating system!
Before last month, my first chance to try out Actionscript 3, I would have thought that big, feature rich, complex apps would be impossible (or rather, run like ass) due to speed limitations of Actionscript. This benchmark very accurately mirrors what I've seen with AS3: its overall performance whips the pants off of Javascript and previous versions of Actionscript, and in many cases hugs Java pretty closely or even beats it (by a small amount). This is after how many years of JVM optimizations and improvements? Not bad.
Think what all has been done with Javascript without getting too slow. Now make the language a lot faster, and add some pretty advanced bitmap and vector graphics support that runs native, and the use of "shared objects" (local storage of arbitrary data). I see possibilities.
Would that even be legally enforceable? A 1.6% stake in Facebook hardly gives them the right to control how Facebook sells off the remaining 98.4%.
Ballmer's, "we sold at a loss yesterday, were selling at a loss today, we will continue to sell at a loss in the future, because we are rich and can afford to do so", is starting to were pretty thin.
The only successful strategy that M$ investors should accept from Ballmer is the creation or in reality the resurrection of MSN's own social networking site.
What is it with tech magazines "Especially when $750 million was the going figure for the longest time. In terms of Google's cash flow, a company accountant could trip coming out of the bathroom and drop that much cash." is this journalist on drugs, what ever happened to accountability, or acting responsibly, or even at least making an appearance of management skill and expertise. Shit no wonder the dotbomb period earlier this century and all the resultant SEC prosecutions. Generally you really only see investing like this when there are ulterior motives and management is using less than honest methods to bleed the share holders by buying craptastic companies at grossly inflated prices, either that or just sheer stupidity and desperation.
Chaos - everything, everywhere, everywhen
Facefook may have all those users, but honestly do people spend that much time on facebook. When you first sign up, you think great now I can track down all my old friends (Like I could on Friends Reunited). Then two weeks later you just get sick of people trying to turn you into a vampyre. I think facebook is just one of those fad things that will pass.
Ballmer: $240 million, it's a deal, will you join me in a celebratory monkey dance. Wwoooo!!!!! wwoooo!!!! wwwooooo!!!! I LOVE FACEBOOK!!! woooo!!! woooo!!
What if Tetris was invented by Nazis?
The article complains about facebook's business model, but it seems to me that they've found a better way to make money than ads--take it from M$.
I was on facebook for kicks and I quickly realized it's full of little kids and their horrible grammar.
Yeah I know. It's terrible isn't it? MySpace and Slashdot are so much better...oh, wait...
Nobody takes any of the serious chatter serious, and the fun chatter is just asinine
Thanks for the chuckle. I always get a kick out of people who criticise the grammar of posts in an online forum and make mistakes themselves, especially when they're given ample opportunity to proofread their postings as can be done on this forum.
Besides that, isn't "serious chatter" an oxymoron? I don't recall ever having a SERIOUS chat on-line ever, and that goes back to the chat rooms of BBSes in the 1980s. EVERY SINGLE chat room and forum I've participated in has some definable signal-to-noise ratio. Even technical support forums and heavily moderated forums have their persistent twits and they are usually the most "serious".
Not like the "friends" you have online map to anything realistic in the "real world."
Facebook, Slashdot, and to a degree MSN, are the only accounts I have that are active, if you don't count my logins at my work and home networks. I only have a very few MSN contacts and 100 percent of them are friends and family I know (not just merely met) in real life. Slashdot profiles allow you to mark people as "friends or foes" and though many people seem to have marked me as one or the other, I haven't really bothered doing likewise, because I tend to reserve judgment for people to which I haven't so much as spoken (or even typed).
As for facebook, there isn't one single person in my friends list that I have not met and do not know "in real life", so in fact, yes the "friends" I have online ALL "map to something realistic". It seems to me that Facebook is actually a bit MORE real than perhaps MySpace or Yahoo or whatever. At least there are usually less degrees of separation to most Facebook friends than there are to Kevin Bacon, which doesn't seem to be the case in many other places.
In sort, lighten up dude! Facebook is a SOCIAL networking site and is advertised as such, so don't be so serious and don't expect seriousness and maturity on a site of that nature that is open to all the "great unwashed masses".
http://wiki.developers.facebook.com/index.php/Fb:silverlight
An in the last ten years, Apple stock has been +4314%, vs Microsoft +89%.
Ten years ago Apple was in the extreme doldrums. Why not take a longer view?
For most of its public lifetime, Apple has underperformed S&P500 *and* NASDAQ. In fact, relative to the broad stock market averages, Aaple has regained the outperform level that it held back in 1992. That's progress, of a sort.
Da Blog
it is mainly for people who graduated from high school pre 1990 and early 90s. the email wasnt all that established back then, and not only that, many email services that came up during the era do not still stand.
Read radical news here
Would that even be legally enforceable? A 1.6% stake in Facebook hardly gives them the right to control how Facebook sells off the remaining 98.4%.
As long as FaceBook signed the contract with that provision, it would be enforceable, even if Microsoft was buying a 0.0001% stake. The size of the stake doesn't matter. The terms of the contract do. And when there's $240 million on the table, making your company worth $15 billion, feeding your self-confidence and giving you delisions of invulnerability and infallibility... You would be surprised at the stupid shit you might agree to in such a state.
Start a happiness pandemic
Oops, that makes sense. I was thinking of it as though it were a publicly traded company, in which case there wouldn't be a contract of sale of that kind and you couldn't make such restrictions. Although, if it were publicly traded, Facebook couldn't then dictate the share price!