Is Microsoft set to buy into Facebook?

Microsoft is believed to be in talks to buy up to five per cent of social networking website Facebook for $500 million (£250 million), an acquisition that would value the fledgling web business at a colossal $10 billion (£5 billion).

According to a report published by the Wall Street Journal late on Monday, the deal could give Microsoft - which already has the advertising sales contract for Facebook and which has struggled to make an impact online, trailing third behind Yahoo and Google - more access to young users with disposable incomes. At the same time, a tie-upwith Microsoft would give Facebook financial and development security at a time when its growth is tied to a proliferation of small applications from independent developers on its site.

Facebook, led by its 23-year-old founder Mark Zuckerberg, may insist on a valuation as high as $15 billion and is considering raising up to $500 million in cash to expand its operations, according to the Journal.

Such a deal could help Microsoft better compete against Google for a growing base of online advertising and put one of the internet's hottest names in Microsoft's stable.

Facebook would benefit from closer ties with developers as it seeks to turn its site into a full-fledged web platform where users can play games, interact and read news about each other, said Forrester analyst Charlene Li.

"If you are building a business around building a platform there is one company that has done it better than anybody else -- and that is Microsoft," she said. "People have been just assuming that Google would be the best partner and that is not necessarily the case."

Google, which has a blogging platform but no integrated social network platform of its own, has also expressed an interest in investing in Facebook, the Journal report said.

"It would probably be pretty good for Microsoft since it has not had the best success in creating really hip, young-people-grabbing stuff on the web," said Kim Caughey, a senior analyst at Fort Pitt Capital Group, which oversees more than $1 billion (£500 million, including Microsoft shares, for clients.

Representatives for Microsoft and Facebook declined to comment.

Zuckerberg has repeatedly said his company wants to remain independent and is seen as preparing to float itself on the stock market eventually.

Facebook has grown to 39 million members, up nearly 63 per cent from 24 million in late May, and is quickly gaining ground on larger rival MySpace, which was taken over by News Corporation in 2005 for what is now seen as a bargain price of $580 million (£240 million). MySpace has more than 200 million users.

Facebook's explosion popularity has also drawn increased scrutiny, including a US investigation into the company by attorneys general concerned about web sexual predators.

New York Attorney General Andrew Cuomo said late on Monday that his office had subpoenaed Facebook and accused it of not keeping young users safe. Facebook said it was preparing a statement about the issue.

After relinquishing an early advantage in the lucrative paid search market to Google and Yahoo, Microsoft is trying to catch up by clinching deals to broker display advertising to some of the leading names in "Web 2.0."

Yahoo and Google are also maneuvering. Earlier this year, for instance, News Corporation chief Rupert Murdoch said he had discussed swapping MySpace for a 25 per cent stake in Yahoo.

Web 2.0 is a catch-phrase for a new generation of Internet services that run on interactive software and typically rely on content generated by users to attract more visitors. Microsoft also has an agreement with popular news site Digg.

(Reporting by Daisuke Wakabayashi, with additional reporting by Michele Gershberg and Yinka Agedoke in New York, Peter Henderson in Los Angeles; editing by Braden Reddall)

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