Is that Facebook guy crazy?

I had high hopes of winning the local lottery last night. The prize money had snowballed to almost S$3 million, and yes, I've said it here a gazillion times before, I would really like an early retirement…PLEASE.

I had high hopes of winning the local lottery last night. The prize money had snowballed to almost S$3 million, and yes, I've said it here a gazillion times before, I would really like an early retirement…PLEASE.

But, as luck would have it, I live to dredge through another day at the office.

So it is with utter disgust that I am reminded about how a young punk, almost 10 years my junior, once rebuffed a buyout bid which carried a figure ending in more zeroes than I would ever see in my bank account. The story goes that...

A year ago, Yahoo, in the hopes of beefing up its own online presence, reportedly offered US$1 billion to take over the deed to Facebook. The social networking site today has 42 million active users, and ranks second only to MySpace.com as the most trafficked social network on the Web, generating 1 billion pageviews a day.

These numbers bode well for troubled Yahoo, which needed an online entity like Facebook to stay ahead of its archrivals, Google and Microsoft.

Facebook's 23-year-old founder Mark Zuckerberg, promptly rejected Yahoo's offer, apparently because he wanted Facebook to retain its independence and, get this, to serve the interest of its users. Awwwww, somebody give the man a Nobel Prize already!

Zuckerberg's bio reads like another billionaire we know...young, cocky and an Ivy League dropout. Rumor mills have it that he turned his mobile off, even as talks with Yahoo intensified, because his girlfriend was in town and he didn't want to be interrupted.

So was this guy crazy to turn down 1 billion buckaroos? Personally, I think Zuckerberg is hoping to ride the wave and holding out for a bigger buyout. Some analysts predict that Facebook's market value could skyrocket to US$10 billion.

Ok, so maybe he ain't quite so crazy. The question then is, was Yahoo? Why was it willing to fork out US$1 billion for a company which, even then, had yet to prove itself a viable business?

Today, the click-through count for ads--its main revenue generator--remains low on Facebook, where half of the company's US$150 million revenues reportedly come from an advertising deal with Microsoft.

Sure, Facebook is intensely popular, and Zuckerberg's strategy to allow programmers to retain the ad revenue their applications generate is an ingenious way to drive the volume of apps on the site.

There's no doubt that Facebook is the flavor of the month, but that shouldn't be the main reason one forks out billions of dollars to buy over a company.

Take for example, eBay's US$2.6 billion bid in 2005 to buy out Internet telephony company Skype. eBay CEO Meg Whitman had championed the union as an "unparalleled e-commerce and communications engine", one that would combine Internet voice communications to create an "extraordinarily powerful environment for business on the Net".

Two years later, this week, the auction site announced Skype's co-founder and CEO Niklas Zennstrom has stepped down.

Mark Main, senior analyst with Ovum, noted in a research note that Zennstrom's departure "confirms" Ovum's earlier analysis that eBay "overpaid" for Skype. Revenues from the VoIP company have slowed, Main said, noting that the service "is clearly not generating anything like the business boost that eBay had expected". Skype's daily usage, which is measured by customer logons during the work week, is also weakening, he added.

With Main's evaluation in mind, it would have been hard to imagine that Skype in 2005, was the  flavor of the month.

Even then, when eBay unveiled its plans to acquire Skype, critics had said US$2.6 billion was too hefty a price tag for a company that offers free or low-cost voice services. Its business model just wasn't viable enough.

And while Whitman had heralded eBay's ambition to integrate the company's PayPal payment system with Skype's VoIP technology, there's still little evidence of that happening today on the auction site.

Merger and acquisition decisions cannot be clouded by current market fad or hype, because fads and hypes die off, and the parent company will be left struggling to figure out a way to convert their purchases into profitable entities in their own right.

Sites such as Second Life, MySpace and Facebook, are today's hot properties.

But before anyone else goes out there waving a US$1 billion cheque as a buyout offer, they might want to stop for a minute and really think about whether the company indeed has a viable, and sustainable business model.