Microsoft may seem to have lost out on Yahoo!, but it is still intent on increasing its presence in the online space. Latest reports indicate that it has sounded out social networking site Facebook for a possible acquisition, a deal, which would cost Microsoft much less than the $47.5 billion it was willing to pay for Yahoo. Also, with Facebook, Microsoft may have a more popular alternative to Google's Orkut.

And while in India Orkut may be the most popular social networking site, on the global internet arena, it is Myspace that rules, with Facebook coming a close second. Media magnate Rupert Murdoch had recognised the potential of social networking much before its recent explosive popularity and had acquired Myspace for $580 million in July 2005, a price that had seemed exorbitant then but not so today considering Facebook's current $15 billion valuation, since its launch on 4 February 2004.

Today, it is the most popular social networking site in the world with an estimated 110 million registered users. Around 230,000 new users sign up every day on average. However, Facebook, founded by former Harvard student Mark Zuckerberg in his dormitory in 2004, is a serious claimant to the top spot, having already crossed 100 million users.

Teenagers and young adults flocked to Facebook after the site expanded beyond university students in 2006, attracting advertisers that want to target users of a particular age or gender. It is poised to continue growing at an explosive rate to surpass Myspace and eventually have a user base of around 300 million.

It is this amazing popularity of Facebook, which has enhanced the social networking experience with several innovative features that has garnered the interest of corporations far and wide. However, founder Mark Zuckerberg has been quite adamant about not selling out but has resorted to minor stake sales to raise funds. Murdoch, the chairman and chief executive of News Corporation, parent company of The Times and owner of MySpace, has, in the past, ruled out buying Facebook, saying that it was overvalued.

Facebook had received its first investment of $500,000 in June 2004 from PayPal co-founder Peter Thiel, followed a year later by $12.8 million in venture capital from Accel Partners, and then $25 million more from Greylock Partners and Meritech Capital Partners.

Ironically, it was Yahoo who had made one of the earliest offers to acquire Facebook, way back in September 2006. However, talks broke down soon after. Google and Microsoft had both evinced interest in acquiring stakes in Facebook, and the latter had acted on its intention by paying $246 million for a 1.6-per cent stake in October 2007. This purchase had valued Facebook at around $15 billion.

This was followed soon after by a $60 million investment by Asian billionaire Li Ka-shing in November 2007 for a 0.4 per cent stake in Facebook, which he subsequently doubled in March 2008 by putting in $60 million more. These deals had also valued the company at around $15 billion.

With the investment in October, Microsoft also made an agreement to sell ads for the social-networking site overseas, beating out a bid from Google. Microsoft already had a deal to sell Facebook banner ads in the US through 2011.

Now, Microsoft is trying to build on its existing relationship with Facebook, and the offer assumes significance in light of its failure to acquire Yahoo and build an Internet search giant to take on archrival Google. This overture is in tune with Microsoft's growth strategy and its statement after the failed Yahoo deal that it will boost its online presence through organic growth or other acquisitions. (See: Microsoft withdraws from Yahoo!; shareholders restive with Yang)

Microsoft's homegrown Windows Live Spaces site has 92 million registered users. In a presentation at Merrill Lynch on Tuesday, Brian Hall, general manager of the Windows Live Business Group, said, "Spaces doesn't have the level of engagement that the Facebooks and MySpaces of the world have," indicating his company's interest in such opportunities.

The existing Facebook investment enables Microsoft to place audience-targeted, or contextual, ads on its network, Hall said. Another rationale for acquiring Facebook would be to make it interoperable with Windows Outlook.

As Microsoft seeks to grow its online presence, one possible target occasionally mentioned as an alternative to Yahoo is AOL, a division of Time-WarnerTWX. But AOL has significant drawbacks for Microsoft. Although it has a big presence in some foreign markets, such as Russia, the portal lacks an advertising platform, already outsources ads through Google, and is not gaining market share, Hall said.

However, both Facebook and Microsoft have refused to comment on this current speculation.