April 12, 2012 at 15:33 PM EDT
Microsoft Swap Bing for Facebook Shares? That’d Be a Good Trade, Says Nomura
In a brief item on CNBC earlier today, capital markets editor Gary Kaminsky made passing reference to a report that apparently claims Microsoft (MSFT) might be considering giving its “Bing” search operations to Facebook after the latter goes public, in return for additional shares in the social networking outfit. Kaminsky said he would make available [...]

In a brief item on CNBC earlier today, capital markets editor Gary Kaminsky made passing reference to a report that apparently claims Microsoft (MSFT) might be considering giving its “Bing” search operations to Facebook after the latter goes public, in return for additional shares in the social networking outfit.

Kaminsky said he would make available more details on the report, though I’ve been unable to turn up that information through CNBC representatives.

In the meantime, Rick Sherlund with Nomura Equity Research, who has a Buy rating on Microsoft, and a $37 price target, and whose firm is not involved with Facebook’s IPO, tells me this afternoon it could be a good thing for Microsoft.

Sherlund, who has no information himself on any pending deals or talks, nevertheless muses that a swap of Bing could at the very least remove a problem for Redmond.

“Microsoft loses $2.5 billion a year with Bing, and that’s a 7-percentage-point  hit to operating margin, so it’s huge,” Sherlund observes in a phone call.

Moreover, “Investors have not been a fan of that line of business for a long time. They just don’t see the rewards.”

As Sherlund sees it, why does Microsoft even need to be in search, when opportunities with touch-screen technologies and tablet operating systems and the like all seem so much more integral to Microsoft’s strengths and goals?

Sherlund further posits that if Microsoft unloaded Bing on Facebook, it would still be able to monetize its services, such as “Xbox Live” and “Skype” through its arrangement with Facebook.

In order for Microsoft to have monetization through search or display ads, they could just turn over the work, the costs to Facebook, and get it back in TAC [traffic acquisition costs],” says Sherlund.

They would still get 80% to 90% of the revenue returned through TAC, they would end up getting most of the revenue anyway,” and without all the headaches.

In addition, and perhaps more important, Sherlund thinks Microsoft could solve the larger problem of how to strike at Google’s cash cow.

“If we asked ourselves why is Microsoft in the search business to begin with, it’s because they want to keep Google from having such monopoly power [in search] that they can use the resultant profit to making forays into Microsoft’s domain,” including things such as Google’s “Chrome” operating system and Android smartphone software.

Having failed to mount sufficient competition to dethrone Google, which still has 60% of the search market, why not help Facebook, which seems better-equipped to compete?

“It’s in Microsoft’s relative advantage to arm Facebook to go after Google more effectively than they could on their own.” Unlike Microsoft, notes Sherlund, Facebook has the “social graph,” the data on what you and you’re friends are interested in. That can make search far more effective than Bing could ever be on its own competing against Google, he opines.

As far as valuation, Sherlund says its an open question how much Bing might be worth on a basis of multiples of revenue. He figures Microsoft perhaps could get 1% to 2% of Facebook’s reported $75 billion to $100 billion valuation. That would add to a stake held by Microsoft already of about 1.6%.

Another question would be how such a swap, if it were ever to happen, would be affected by Microsoft’s relationship with Yahoo! (YHOO) to provide search results and share revenue.

On a related note, Microsoft today said that it will start to charge developers to use the “application programming interface” required to plug into and draw upon Bing search results.

Microsoft shares today are up 64 cents, or 2%, at $30.99.

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