Nick made some very astute comments about the deal. He rightly corrected the mistaken belief that the deal clearly “values” Facebook at $15bill.
Extrapolating Facebook’s true worth from Microsoft’s investment is a ridiculous exercise, for two main reasons. First, the investment is part of a broader deal, the details of which are unknown. Clearly, Facebook needs cash to support its growth, and the cash payment was a price Microsoft had to pay to nail down the partnership. It has to be seen in that light, not as a market-cap marker. Second, and more important, Microsoft’s investment is not financial but strategic. The company is currently engaged in a multi-front competitive battle under conditions of great uncertainty. Facebook forms one of the fronts, and partnering with the company is far more about gaining future strategic options and blocking the advance of a competitor (Google) than about making a financial gain through the appreciation of Facebook stock. Microsoft, in other words, is about as far from being a dispassionate investor as you can get. Its investment, in isolation, tells us very little about the true worth of Facebook.
Therein lies the problem – without knowing how the deal is structured, without knowing MS’s strategy viz a vis Facebook and without understanding Facebook’s previous and future strategy, all we have to assess value is a straight line percentage/market-cap model. Truth is no one knows where social networking will lead, how it will be monetzed once mature and what it’s ultimate potential is – we’re all investing in a concept.