VCs see hungry Microsoft prowling to buy

NEW YORK/BOSTON (Reuters) - Microsoft Corp's (MSFT.O) bid for Yahoo Inc (YHOO.O) indicates an acquisition hunger that could prompt it to gobble up a chain of smaller companies, venture capitalists said on Wednesday.

VCs participating in the Reuters Global Technology, Media and Telecoms Summit see new deals for the next 12 to 18 months fueled by the few sectors that appear resilient to valuation concerns, such as alternative energy and social networks.

For Microsoft, the aim to compete for the Internet advertising behind Google Inc's (GOOG.O) growth may take it beyond its pursuit of Yahoo. Microsoft pulled a $47.5 billion offer to buy Yahoo earlier this month and has been discussing alternative deals with the Web company.

"If they can't buy Yahoo, they're going to do whatever it takes to dominate that space," David Chao, co-founder of DCM, said in a panel discussion between New York, San Francisco and Boston. "There's a whole value chain of companies in between that eventually they're probably going to buy."

Navin Chaddha, managing director of Mayfield Fund, said the hype over social networks may not be overstated. Advertising in the sector is expected to grow to $2 billion this year from $1.2 billion in 2007, he noted.

"It's going to be mainstream, it's going to be ubiquitous, it's where people are going to hang out," he said. "There's going to be scarcity value. The next Yahoo, the next Google ... are going to be created. If you have this kind of scale, you are bigger than any TV network."

FACEBOOK: RIDING OR BREAKING THE WAVE?

But Chaddha still advises start-ups and their investors to take a wider margin of error when it comes to the amount of time it will take to cash in on the business.

"In this environment it is extremely prudent ... to fully finance companies that have cash on their balance sheet, to be conservative, I would say for the next 2 to 2-1/2 years because we don't know where they're going to head in the next 12 to 18 months," he said.

For Facebook, one of the biggest social networks, it could be a tough choice between a deep-pocketed acquirer or going it alone to an initial public offering.

"I would say to the extent they see continued growth, and really only Facebook knows that, they're in a position to continue on as is," said Bob Davis, general partner at Highland Capital Partners. "It is not riding a crest. It is the crest in terms of what's taking place out there today."

Chao said he doubted Facebook could fend off potential competition in the same way as Google, which beat out about a half-dozen rivals within a few years to become the world's Web search leader by a wide margin.

"Because (social networks) are viral, other competitors could come in a different niche, whether by language, by geography, who knows?" he said. "I don't think it will monopolize the market the way Google has."

But he does believe Microsoft could pony up the billions needed to acquire both Yahoo and Facebook, in which it holds a minority stake, as well.

"If I were Microsoft, why not buy both?" he said. "They have the cash to do it ... and if they miss out on this window, they miss the entire Internet advertising space."

(For summit blog: summitnotebook.reuters.com/)

(For more on the Reuters Global Technology, Media and Telecoms Summits see ID:nL1919425

(Additional reporting by Ritsuko Ando in New York and Scott Hillis in San Francisco; editing by Phil Berlowitz, Gary Hill)