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Originally published May 16, 2012 at 8:26 PM | Page modified May 17, 2012 at 6:10 AM

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Microsoft poised to reap rewards from Facebook IPO

When Facebook completes its initial public offering this week, Microsoft certainly will benefit financially. At the high end, Facebook could...

Seattle Times technology reporter

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When Facebook completes its initial public offering this week, Microsoft certainly will benefit financially.

At the high end, Facebook could be valued at up to $104 billion, which means Microsoft could see its original investment in Facebook grow in value from $240 million to up to $1.6 billion.

Microsoft, which now has a 1.8 percent stake in Facebook, is also planning to offer 6.6 million of its 33 million shares in the IPO. If valued at the high-end estimate of $38 per share, that means Microsoft would make some $250 million.

Not bad for what was a relatively small investment, for Microsoft, back in 2007.

But probably more important to Microsoft than the money is the partnership the two companies have built over the past six years. They've made mutually beneficial moves in the fight against their common competitor, Google.

"Facebook has been really valuable as a way for Microsoft to reach customers it couldn't get to otherwise," said Rob Helm, an analyst at independent research firm Directions on Microsoft. "It's an asset for Microsoft's business products as well."

The relationship between the two companies started with a 2006 deal in which Microsoft would sell banner advertising and sponsored links on Facebook. The two companies also agreed to work together on future technology initiatives.

Then, in 2007, Facebook accepted Microsoft's offer of $240 million to buy a 1.6 percent stake, reportedly choosing it over competing offers from Google and Yahoo.

That year, the partners expanded their advertising relationship, with Microsoft selling banner ads for Facebook overseas.

In 2010, Microsoft and Facebook announced a partnership to build social search in Bing. Since then, Microsoft has added Facebook features to Bing, including indicating when websites in search results are "liked" by the searcher's Facebook friends, indicating which pages within popular websites are "liked" by friends, and allowing users to link websites related to them in Bing search results.

In addition, Skype, a division of Microsoft since October, last year started allowing its users to conduct video chats with Facebook friends both on Skype and on Facebook.

Facebook, and other social networks, are also deeply integrated into Windows Phone.

Last month, Microsoft sold 650 patents that it had bought from AOL, along with rights to 275 more, to Facebook, a move thought to benefit Facebook in its patent battle with Yahoo, and to be boon for both Facebook and Microsoft in their fight against Google.

And last week, Microsoft announced its biggest-ever overhaul of Bing, which is slowly making inroads on the dominant Google. A major part of that overhaul? Facebook, one of several social-media networks whose content will be included in one of three columns in Bing's revamped search results page. (Google does not have Facebook data in its search results page, although it does include content from Google+, its own social-networking site.)

"Microsoft deserves some credit for recognizing pretty early on how important Facebook would be and maintaining that partnership for a long time," said Helm, the Directions on Microsoft analyst. "Business partnerships are like mayflies. This one has held up really well."

What makes Facebook such an enticing partner, Helm said, is that there are so many Facebook users out of reach to Google, Microsoft and others because certain privacy settings can make Facebook user information invisible on the public web.

Being able to get behind that Facebook "wall" to reach those users — either for advertising or to engage them in trying products — is what makes such a partnership so alluring.

There are also more subtle ways that the partnership has benefitted Microsoft, Helm says, citing technologies that Facebook has pioneered that are finding their way into Microsoft's business offerings.

For instance, although SharePoint, Microsoft's collaboration software for businesses, doesn't include Facebook itself, it has Facebook-like features, including activity feeds and status updates for co-workers.

"This is speculation but I think it's likely, in the future, there might be closer links," Helm said.

Though the two companies have had a close partnership so far, Microsoft — and other Facebook partners — may have to pay even more attention to what Facebook says once it goes public.

"Once Facebook has a $96 billion capitalization or whatever," Helm said, "it's going to be in a different weight class in terms of how it deals with all of its partners."

Janet I. Tu: 206-464-2272 or jtu@seattletimes.com.

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