Last year when Microsoft invested in Facebook at a $15 billion valuation I doubt they expected Yahoo! would soon fall below that level. As of yesterday’s closing price, the company now has a market capitalization of $12.67 billion, over $2 billion less than Microsoft valued Facebook at. Facebook is now valued at around $4 billion according to leaked reports about internal stock sales.

In terms of traffic, Facebook still pales in comparison to Yahoo who attracts hundreds of millions of users each month to the site. Facebook has serious momentum though as it has more than doubled its traffic in just 10 months. We also know that Microsoft is no longer interested in acquiring Yahoo! aside from a potential search partnership. So where is Microsoft going to spend all their cash?

One option is to stay cash heavy to make it through the recession over the next year. The company can still spend some serious cash though, but probbly not enough to buy Facebook. The company currently has over $9 billion in cash and close to $12 billion in short-term investments. That means in a short period of time they could acquire either Facebook or Yahoo, and Steve Ballmer has already dismissed the latter.

If you were Microsoft would you take the plunge and try to acquire Facebook? Could Facebook become larger than Yahoo! in the near future? Mark Zuckerberg has stated that he isn’t looking to sell the company but it would be pretty hard to turn down $9 or $10 billion in cash. At this point it’s all speculation but I think the dire situation for Yahoo! puts Microsoft’s Facebook investment in perspective.