The real facebook deal

A few weeks back Microsoft paid a large sum for a very small slice of Facebook. There has been a lot of commentary but this post makes the most sense and includes some very good underlying reasons for that deal.

For some earlier discussion see Microsoft & Facebook on Rods blog. And over here on the valuation implications More on the MS/Facebook deal which quoted Nicholas Carr.

My comment at the time was: (It seems like the deal is much more about the advertising rights than anything else. This paragraph below is a direct quote from one of the reports.)

“In a conference call on Wednesday afternoon with press and analysts, Van Natta and Kevin Johnson, Microsoft’s president of platform and services, emphasized that this deal is all about the existing advertising partnership between the two companies, which has been going on for over a year now. Facebook founder Mark Zuckerberg, it should be noted, was not present on the call.”

However Marc Lehmann* has absolutely nailed it in his excellent post on the topic –Facetime with Facebook Bought Cheap. You should read his whole post – it is so good I wish that I wrote it. 🙂

(Marc is Founder of – and previously a Debt/Equity Trader at Deutsche Bank.)

Marc notes about 10 of benefits this deal achieves for Microsoft.

  • Buys probably the equivalent of 10’s or possibly close to 100 million dollars worth of PR. Online, paper and TV. Screen real estate for 3 months as people speculate. So their Facebook spend isn’t 260mio already it’s a lot less.
  • Wash Facebook brand onto Microsoft’s brand.
  • Makes it easier for Microsoft to buy a blocking stake later. They already have a start now.

These are just the first 4 -read the rest of his list. And even better -this paragraph near the end.

And the best M&A trick of all is…
Microsoft pays up for the first chunk, then the seller/victim re-benchmarks price in their mind and any suitors that come along look cheap and nasty.

As a result new suitors say no to Facebooks attempts to get some price tension. The new suitors don’t even try. Then all of a sudden Facebook is left with their initial investor who has only bought a small percentage.

Time passes, more time passes and Facebooks business model of low cash and high cost is starting to show particularly as the US economic slowdown hits. What do you know Microsoft does not want to pay the same price any more.

There is a much bigger story on the Microsoft / FaceBook deal as Marc highlights extremely well.

Blog Note: If you spotted that my post frequency has been down lately – here is what happened. WordPress completed not 1 but 2 version upgrades (now at 2.3.1) recently and I thought my upgrade processes were at fault. Consequently have rebuilt the entire blog not once but 3 times!

After hours of testing on mirror sites and the live version finally concluded that at least one of my plugins was at fault. Today I found out which one that is – have now fixed the problem and there will be some catch-up posts including one on WP plugins and how you can maybe save some time if you have WordPress and run into similar issues.