Google is less than a decade old but is already used to being the biggest player in town. It wanted a bigger stake in Facebook than Microsoft was willing to settle for -- as much as 10% to 15% of the privately held company's shares, according to two people involved in the process.
Google also wanted to influence Facebook's business strategy and to terminate a year-old deal under which Microsoft sold banner ads that appeared on the social networking site.
Microsoft, the world's largest technology company, isn't usually described as humble, but in this case it was willing to let Facebook be Facebook. In the end, Microsoft agreed to spend just $240 million -- about as much cash as it generates in a week from its software -- in exchange for a 1.6% stake.
"Facebook wanted to play for the future, and on their own path, and grow organically," said one participant in the deal process who, like the others, requested anonymity because the talks were confidential.
Such confidence has been a hallmark of Facebook's style for some time. Zuckerberg, who helped start the company in 2004 while a Harvard undergrad, rejected a reported $1-billion offer for the whole company from Yahoo Inc. last year.
Zuckerberg, whose 20% stake is now worth $3 billion, said last week that a stock offering was years away.
Facebook, which employs fewer than 400 people, is the sixth-most-visited site on the Web, according to research firm ComScore Networks. The majority of its users are now overseas.
The young firm was a natural prize for Microsoft because the world's largest software company is scrambling to catch up with Google. This year Microsoft spent $6 billion -- more than three times as much as the 32-year-old company had ever spent on a takeover -- to snap up digital marketing firm Aquantive Inc. so it could better target ads.
"I don't think they can take the Windows franchise much further," Citigroup analyst Brent Thill said. "The online segment is clearly the biggest opportunity at the company, and it's the smallest percentage of revenue to date. For the first time in five years, they've actually articulated a strategy that makes sense."
The real payoff might not be in simple banner-ad revenue, analysts said. Facebook is expected to sell just $125 million in advertising this year, according to research firm EMarketer, far less than the $525 million expected at MySpace. Rupert Murdoch's News Corp. acquired MySpace's parent company in 2005 for $580 million, which has proved an incredible bargain.
