Traders Cooperative

[AD]

Microsoft's Facebook deal makes no sense
By John C. Dvorak
Last Update: 12:01 AM ET Oct 27, 2007

BERKELEY, Calif. (MarketWatch) -- Is Microsoft Corp. nuts?
The software giant's latest deal is spending $240 million for 1.6% of Facebook, valuing the social-networking firm at $15 billion./

With estimated revenues of $150 million, Facebook would normally be valued at between one times its revenue to perhaps 10 times revenues, if it was growing like crazy. With a valuation of $15 billion, this would be 100 times revenues. If you owned a company with total revenues of $50,000, then Microsoft
would value your business at $5 million.

Facebook's already grown like crazy and perhaps has a few more years to go, but it can't get too much bigger.
There are a near-infinite number of ways to look at these sorts of deals, but even as an investment with benefits, this is too much.

This is $300 a head for what are essentially bloggers, duds, poor students and hangers-on.

I suppose you could look at it not as an investment, but as an incentive to give Microsoft the advertising franchise for the entire Facebook operation. But how exclusive can the arrangement be? Is Microsoft going to set up shop as the exclusive conduit for all Facebook advertising, kind of a middleman or ad broker?
Microsoft is going to place ads, sell ads, broker ads and do some sort of revenue split with Facebook. For that, Microsoft pays $240 million and gets 1.6% of the company. When you extrapolate the valuation of Facebook and run the figures against the user base of around 50 million, it means that each and every user is tallied at $300 a head.
I thought valuing registered users of Web sites got expensive back in 1999, when they were as high as $100 a head; $300 is sky-high.
You can read all you want about what a customer is worth. I have heard of company's paying $400 for corporate customers that are known buyers of data-processing gear. I can understand that, somewhat.
But this is $300 a head for what are essentially bloggers, duds, poor students and hangers-on. What are these people constantly buying that makes them worth that much?
Not to belabor the point, but exactly why is Microsoft even in this business? Most of us in Silicon Valley who watched this go down are convinced that it was Google Inc. that tricked Microsoft into overpaying for its miniscule percentage.
Given the DoubleClick deal and other possible events where Microsoft and Google were bidding on the same company, it's believed that Microsoft had to win one of these head-to-head competitions at least once.
That led to the argument that Google wasn't seriously interested in getting a piece of Facebook, but in making enough noise about it to sucker Microsoft into a bidding war. Then Google apparently pulled out and left Microsoft with the high bid, almost as if the search company was a shill.
Whereas if Google had won the bidding war by chickening Microsoft out, it could just avoid consummating the deal, or could simply kill it or reduce the price.
With Microsoft suckered into winning, it will probably not be able to swallow its pride. Redmond executives would look foolish if they changed their minds under these circumstances.
Microsoft has got to know that these social-networking schemes come and go, and that users jump around from one to the other like fleas on a hot brick.
I'm not seeing how this makes any sense to the company.

http://www.marketwatch.com/news/story/microsofts-facebook-deal-makes-no/story.aspx?guid=%7B78F7D965%2D7474%2D4A82%2DBE79%2D063A36EEFB8A%7D&dist=morenews_ts