Facebook will sell a $240m minority stake to Microsoft, which as part of the deal will also expand the advertising services it provides to the social networking site, the companies have announced.
The size of the ownership stake Microsoft will take during Facebook's next round of financing puts Facebook's valuation at a whopping $15bn. Google had reportedly been courting Facebook as well.
In addition to the ownership piece, Microsoft will also extend its existing agreement to provide banner ads to Facebook in the US. With this deal, Microsoft will become Facebook's exclusive third-party ad platform, as well as provide Facebook ads internationally.
"This is about placing a big bet on the future of Facebook and positioning Microsoft possibly for an outright acquisition later, as well as keeping Facebook away from Google," said analyst Greg Sterling from Sterling Market Intelligence.
During a conference call after the announcement, Owen Van Natta, Facebook's vice president of operations and chief revenue officer, didn't acknowledge Google was one of the company's suitors.
He said Facebook chose Microsoft because of its reputation as one of the world's top technology providers. "We were fortunate to have a lot of folks who wanted to partner with us around advertising," he said.
Kevin Johnson, president of Microsoft's Platforms and Services Division, called the deal a "big vote of confidence" for Microsoft's advertising strategy.
However, he said advertising is just one area of convergence for the companies, though he declined to mention specifically in what other areas of technology or business the two companies will collaborate.
Facebook will likely devote the cash influx from its next financing round to bankroll the torrid growth it is expecting in the coming 12 months in usage and headcount.
"This is clearly good for Facebook, as they get a big pile of cash to expand, and Microsoft has given them the valuation they were looking for," Sterling said. "So Facebook gets a big chunk of money and a massive valuation."
With about 300 employees now, Facebook expects to have about 700 a year from now, its CEO and co-founder Mark Zuckerberg said last week at the Web 2.0 Summit.
Meanwhile, the site is growing its usage at breakneck speed, with about 250,000 new users registering every day.
Founded in 2004, it currently has about 49 million active users, up from 12 million in December. Over half of its active members return to the site daily. Some 59 percent of its users are outside the US.
Yesterday, The Wall Street Journal and The New York Post reported that Facebook was in the final stages of making a decision on whether to do this deal with Microsoft or Google.
For Microsoft, which hasn't attained as strong a position in online advertising as it had hoped, and lags behind Google, landing this deal could be a major win, as long as Facebook proves to be as attractive an advertising vehicle as expected.
Microsoft and Facebook signed their original advertising deal in August 2006 and months later extended that agreement through 2011.
The Journal reported later on Wednesday that Facebook expects a profit of about $30m this year, on revenue of $150m.
Google and Yahoo provide ads for Facebook rival MySpace.
Since News Corp bought MySpace in 2005 and Google bought YouTube last year, "for Microsoft, this was a must-win," said Allen Weiner, a Gartner analyst. "They needed to do whatever it took."
With this deal, Microsoft sends a clear message that it is serious about its intention to be a major online advertising platform player, Weiner said.
Still, questions remain about social-networking sites' full potential for advertising, since most of their content is largely unregulated and created by millions of individuals, resulting often in material that is vulgar and objectionable.
"There is some merit to those questions about social-networking sites as viable advertising vehicles," Weiner said.
However, these sites will probably evolve and look very differently in five years, when, in addition to their core social-networking functions, they'll also likely be platforms for delivering media content to its members, Weiner said.
Facebook plans to share more ideas for revving up its advertising business on 6 November, at an event in New York to which it has invited what it calls "its closest advertisers".
"As part of [the event], Facebook executives will discuss new approaches for advertising online," a Facebook spokeswoman said. "We are not sharing any further details."
Facebook, MySpace and others are also under close scrutiny from law enforcement agencies in the US and abroad because sexual predators use social-networking sites to stalk and victimise people, in particular minors.
According to Hitwise, Facebook was the ninth most visited site in the US during the week ending 20 October. Within the social networking category, Facebook.com received 15 percent of US visits during that week, placing second behind leader MySpace, which got 76 percent of visits, according to Hitwise.
The Journal first reported Google's and Microsoft's pursuit of the Facebook investment a month ago.