Microsoft hopes to acquire a five percent stake in Facebook, and has approached the fast-growing social-networking site in recent weeks proposing an investment in the region of $300m to $500m, according to the Wall Street Journal.
Google has also expressed an interest in acquiring a Facebook stake recently, according to the Journal. Thus, Microsoft could find itself competing for Facebook's attention with Google.
However, Facebook's discussions with Google and Microsoft are in the early stages and could end up with no agreement with either suitor.
Reached by IDG News Service, Facebook, Microsoft and Google declined to comment.
Founded in February 2004, Facebook is one of the world's most popular social-networking sites with about 42 million active users. Facebook has been growing strongly in the past 12 months. In December, it had about 12 million active users.
The site initially admitted students only, but last September it lifted that restriction. In May of this year, it opened up to third-party developers to create applications for the site, which has also added to its popularity with users.
Along the way, it has caught the attention of big internet players such as Microsoft, Google and Yahoo. The latter reportedly tried to buy Facebook last year for $1bn.
Facebook's attractiveness is that it builds very strong and deep relationships with its users. Over half of its active members return to the site daily, and Facebook knows a lot about them thanks to all the personal information people disclose on their site profiles and interactions with other members.
This, in turn, offers a desirable audience to advertisers and to ad sellers and distributors such as Google, Microsoft and Yahoo. A little over a year ago, Facebook chose Microsoft to display banner ads on the site.
"Facebook may well be one of the most important platforms in the future, and Microsoft controls platforms like Windows and IE, so it's important for Microsoft to work with Facebook," said Josh Bernoff, a Forrester Research analyst.
Gartner analyst Allen Weiner said that by acquiring a stake in Facebook, Microsoft could deepen its existing relationship with the company, possibly in the area of 'widget' applications. Through an investment, Microsoft could also potentially keep rivals Yahoo and Google away from Facebook, Weiner said.
Facebook would be interested in using the cash raised from selling a stake for buying other companies, increasing its staff of around 300 and beefing up its technical infrastructure, the Journal reported.
Facebook is also weighing the option of raising funds from financial investors.