Microsoft may be thinking about trading its Bing search with Facebook for more of the social network's shares once FB goes public.
According to Rick Sherlund of Nomura Equity Research, who has a Buy rating on Microsoft and a $37 price target, Bing is an unnecessary burden to Microsoft at this point.
"Microsoft loses $2.5 billion a year with Bing, and that's a 7-percentage-point hit to operating margin, so it's huge," said Sherlund. "Investors have not been a fan of that line of business for a long time. They just don't see the rewards."
Sherlund added that Microsoft's decision to unload Bing onto Facebook would make sense because Microsoft really has no business being in search to begin with. Originally, the company probably did this to give Google some competition, but surrendering Bing to Facebook would give Google more of a run for its money.
Instead of search, Sherlund believed that Microsoft should focus on its strengths, which are operating systems, its gaming platform Xbox 360 and Xbox Live, and mobile touch-screen technologies.
Breaking up with Bing and gaining Facebook shares could also allow Microsoft to monetize its services like Xbox Live through Facebook without all the additional headaches associated with owning it.
"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]," said Sherlund. "They would still get 80 percent to 90 percent of the revenue returned through TAC, they would end up getting most of the revenue anyway."
The advantages are there, and Sherlund isn't the first to recognize them. According to Forbes, a new e-book for Amazon Kindle called "The Facebook IPO Pitch," which was written by an anonymous author claiming to run an internet advertising and marketing firm, made the same claims.
Back in July, The New York Times wondered why Microsoft didn't hand Bing over to Facebook as well. More recently, CNBC reporter Gary Kaminsky brought the idea up and spurred more conversation on the topic.
If Microsoft were to give Bing up to Facebook in exchange for additional Facebook shares, it would have to be after the social network's initial public offering (IPO). Microsoft could possibly get 1 to 2 percent of Facebook's approximate valuation, which is $75 billion to $100 billion.
