The Difference Between Sense And Nonsense: Trying To Make Sense Of Microsoft's Facebook Deal

Overhype

from the hint:-it's-nonsense dept

Sure, it had been rumored for over a month now, but the news that Facebook actually convinced Microsoft to buy a stake at a $15 billion valuation still makes you do a doubletake. Microsoft put in $240 million for a tiny 1.6% of Facebook. This is less than the $500 million originally rumored, but it tips the scales in terms of totally ridiculous valuations. We had thought that it was Skype who had played the game the best in its insanity inducing ascent to getting bought. Despite only having revenue under $10 million per year, the company started spreading rumors that it was worth over $1 billion. This was helped along by a reporter who confused millions and billions, and suddenly we were off to the races. Suddenly, without any real change in business prospects, we were told that the company was worth $3 billion and then the suitors really started showing up until eBay coughed up $2.6 billion with earnouts that could have brought the deal to $4.3 billion. Of course, we all know how that game ended: eBay just evaporated $1.43 billion of that deal. Last year, it was YouTube who played the same game, riding the hype and whispers to a Google buyout for what now appears to be a paltry $1.65 billion (plus legal headaches). That was merely around $3 million for every day the company had existed.

However, in 2007, we clearly have a new champion at this game. Facebook is most certainly a popular and viral site. However, there are still plenty of questions about how much money the site can really generate long term. When Yahoo apparently tried to buy Facebook last year for $1.62 billion, the math still seemed ridiculous and hard to support. To then make the case for a valuation 10x only a year later goes into fantasy territory. Also, there’s a big question about what Microsoft gets out of this. It’s hard to see them getting a huge return on the investment. Yes, Facebook is growing and there are some interesting possibilities there — but we’ve also seen every other social network before Facebook grow rapidly, peak, and then fall off the map pretty quickly as well. And, even with the growth rate and adoption for Facebook, the rumors concerning how much revenue it’s bringing in make it next to impossible to for this valuation to make any sense. About the only rationale that seems to make sense is that Microsoft just threw away $240 million to block Google from getting the deal. Maybe that’s worth $240 million (pocket change) to Microsoft in the grand scheme of things — but it’s difficult to see Facebook ever being able to justify that kind of valuation unless something massive changes in the near future. Still, it’s great news for Facebook and Mark Zuckerberg who were able to play this game better than anyone we’ve seen before. Meet your new valuation insanity champion.

Filed Under: bubble
Companies: facebook, google, microsoft