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“Microsoft Corp.'s $240 million investment in Facebook Inc. -- a three-year-old company with more promise than profit -- represents a huge bet that the online advertising boom will continue and the popular social networking site will be among the biggest beneficiaries.

“The software giant said yesterday that it will buy a 1.6% stake in Facebook, beating out Google Inc. after intense lobbying. The deal places a $15 billion valuation on the closely held Palo Alto, Calif., start-up. Facebook… expects to break even this year, on a cash-flow basis, with revenue of $150 million, according to people familiar with the company.

“The high valuation for Facebook is the latest sign of a renewed exuberance in Silicon Valley over Internet companies with lots of users -- even if those users haven't yet translated into much revenue -- and is reminiscent of the Internet bubble that ended in 2000. Microsoft and Facebook say the valuation is justified and that Facebook is starting to find ways to monetize its rapidly growing user base.

“‘We're pleased with the economics of this deal,’ said Kevin Johnson, president of platform and services at Microsoft, adding that Microsoft and Facebook have ‘both learned a lot’ from their experience with Facebook ads.

“The deal is rooted in an online-advertising boom that has turned Facebook into the newest Internet darling…

“Winning Facebook's hand could help lift morale at Microsoft's struggling online business. Over the past four years the software giant has invested heavily into building its own Internet search and online advertising services but has failed to keep pace with the growing online ad market and its leader Google.

“Microsoft fought hard and lost to Google a string of deals with companies including Time Warner Inc.'s AOL unit and DoubleClick Inc., which Google earlier this year agreed to buy for $3.1 billion. Those losses and the steady growth of Google's share of online advertising have irked Microsoft Chief Executive Steve Ballmer, say people familiar with the company.

“As a result, Microsoft scrambled to keep Facebook from falling into Google's hands.”

(“Microsoft Bets On Facebook Stake And Web Ad Boom.” Robert A. Guth, Vauhini Vara and Kevin J. Delaney. Wall Street Journal: October 25, 2007. pg. B.1)

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