Why would Microsoft pay $1.2 bn for Yammer?

Social networking designed for business collaboration might sound boring, but Microsoft is shelling out $1 billion for the very thing. The software giant announced on Monday that it would buy Yammer, which operates a social network for businesses and corporate firms.

The big question on everyone’s mind is what does Yammer do? The other intriguing bit is why Microsoft is paying nearly $1.2 billion to acquire it? When Facebook bought Instagram for a $1 billion at least everyone knew what Instagram was all about.

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But there is the fact that Yammer caters to corporate consumers. Yammer provides a secure, private social network for companies. According to a report in the Wall Street Journal

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Yammer seeks to get workers to adopt its free social-networking features in the hopes their employers will catch on and pay for upgrades. Yammer has said it has more than four million corporate users, only 20% of which are paying for Yammer services.

So why does Microsoft want Yammer?

Microsoft CEO Steve Ballmer is counting on Yammer’s sharing tools to ensure that long-established Microsoft applications, including its word processing and spreadsheet programs, remain vital components for getting work done. Google Inc. has emerged as a threat with a toolbox of similar programs that run primarily over the Internet rather than on individual machines.

“Think of Yammer as a fundamental part of our Office family,” Mr. Ballmer said on a Monday conference call to reporters.

Microsoft will have much of the same autonomy given to Skype since that deal closed eight months ago. Yammer will continue to be run from its San Francisco headquarters by its co-founder and CEO, David Sacks. It will also continue to provide its services separately from Microsoft’s offerings.

Microsoft did not give a time frame for when the deal should close.

When it started in 2008, Yammer raised its initial funding from Peter Thiel Facebook’s first major investor. Mr. Thiel formerly worked with Mr. Sacks while they were both executives at PayPal, an online payment service that eBay Inc. bought for $1.5 billion in 2002.

Sean Parker, the former Facebook president depicted by Justin Timberlake in the 2010 movie “The Social Network,” also sits on Yammer’s board of directors. Mr. Parker still owns a 4.6 percent stake in Facebook currently worth about $2.2 billion.

Microsoft has its own financial ties to Facebook, having invested $240 million in the social network in 2007. After selling $250 million in stock in Facebook’s initial public offering last month, Microsoft still retains a 1.7 percent stake worth about $840 million.

Yammer has relied largely on word of mouth to attract more than 5 million registered users at more than 200,000 companies worldwide.

The service depends on employees to use its free tools to set up a private network within their company. Once the network is getting wide usage, Yammer then tries to sell more sophisticated features to the companies.

With inputs from AP