Greed May Cost Facebook

Oh, those crazy coeds. The Wall Street Journal is reporting that buyout talks between Yahoo! (Nasdaq: YHOO) and social-networking site Facebook are starting to fall apart. After failing to hook up with the likes of Microsoft (Nasdaq: MSFT) and Viacom (NYSE: VIA), it seemed as if a deal with Yahoo! for roughly $1 billion was beginning to materialize. This morning's report claims that Facebook is now looking for Yahoo! to raise its offer.

Could greed ultimately become Facebook's downfall? The company supposedly turned down a $750 million offer earlier this year; it was looking for a deal in the $2 billion range. Obviously, it's not going to fetch anything near that sum. Much more popular online destinations like MySpace.com and YouTube have been acquired for less than that over the past year. If anything, Google's (Nasdaq: GOOG) deal to snap up YouTube for $1.65 billion earlier this week should have been a good incentive for Facebook to accept Yahoo!'s latest offer.

According to Alexa.com, YouTube is generating four times as many page views as Facebook. Making matters worse for Facebook, comScore Networks finds that traffic to the site has fallen from 14.8 million unique visitors in August to just 13.3 million in September. Shouldn't traffic at the site be picking up now that the new school year has started?

In Facebook's defense, it has a clever approach of creating walled communities that allow college and high school students to interact only with their fellow classmates. That has made it a saner alternative to the wild world of MySpace. What's more, Facebook reaches a young crowd that advertisers covet. This is where top brands love to land a consumer for life.

Snagging Facebook really would be a good fit for a struggling Yahoo!, and it would also be a brutal blow to Microsoft, which signed a Facebook ad-distribution deal just two months ago. A Yahoo! buy would also help Facebook start over with a clean slate and overcome some recent changes that its active community hasn't overwhelmingly embraced.

The problem is that Yahoo! has to be careful, because it has a reputation for overpaying. It clearly paid too much for companies like GeoCities and Broadcast.com during the dot-com bubble days. It also has to deal with what seems to be a rather eccentric Facebook CEO in the young Mark Zuckerberg. An unflattering Wall Street Journal article last month featured some pretty damaging anecdotes about the Facebook chieftain, including the time he ducked out of heated negotiations earlier this year with another prospective buyer because his girlfriend was flying in for the weekend, or the time when another suitor was talked out of an 8 a.m. meeting time because Zuckerberg wasn't an early riser.

That paints a picture of the kind of corporate leader you want to see fail. But let's give Zuckerberg some credit here. In just two years, he has managed to build one of the most dynamic communities in cyberspace. He stands to make a pretty penny whether he deals, keeps the company independent and goes the IPO route, or simply passively collects Microsoft's ad royalties.

But greed has apparently cost the company before. Let's hope it doesn't happen again.

Yahoo! is a Motley Fool Stock Advisor recommendation. Microsoft is a selection of the Inside Value newsletter service. All of our newsletters come with a free, 30-day trial.

Longtime Fool contributor Rick Munarriz wonders whether loners embrace social networking. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.