The deal will provide Microsoft with targeted information about users on the LinkExchange network, as well as gain another channel to promote its services to the network's members.
LinkExchange members participate in an ad-banner network that allows users to advertise for free throughout its 800,000 sites. In return, members agree to support advertisements from both other members and outside sponsors on their sites.
For Microsoft, the acquisition enables MSN.com to offer a service to small businesses, a market that many other portals have pursued. Advertisements for these Web sites also will appear in Web search results pages, as well as throughout MSN's network of sites. Microsoft, in return, can use the network of sites to promote its own products, according to Laura Jennings, MSN vice president.
"From a small-business perspective, we can take LinkExchange's services and combine them with Microsoft technology," said Jennings.
The San Francisco-based company has 100 employees. Microsoft is paying $250 million for LinkExchange, which was originally funded by venture capital firm Sequoia Capital, the Wall Street Journal first reported.
"It's a similar type of a move to Yahoo buying Yoyodyne, and Excite buying MatchLogic," said Drew Ianni, an analyst at Jupiter Communications. "It's similar in regards to targeting and enhancing the value of advertising."
For the past year, the Microsoft has significantly ramped up its Net efforts by launching and acquiring a number of Web properties, such as Sidewalk and Hotmail, to join existing commerce and information sites such as CarPoint, real estate service HomeAdvisor, and travel resource Expedia.
In July, Microsoft announced it would bring all of its Web properties under one MSN-branded roof as a means of offering heftier advertising packages promising wider audience reach. Instead of selling advertising deals based on one site, Microsoft will up its price tag when offering a network-wide advertising deal.
In addition, the re-packaged Web sites added an "MSN" to the beginning of each name, which further allowed the MSN.com portal to incorporate and promote more Microsoft content under one unified brand.
The strategy is not without its critics. Microsoft is embroiled in a legal battle with the Justice Department and 20 states, which have charged the software maker with using its dominant position in the operating systems software to control the browser market and possibly the fledgling Internet market.
Bloomberg contributed to this story.