User-generated news site Digg has been working with influential investment bank Allen & Co. (the ones that recently got Slide a half billion dollar valuation) for a few months now, and pitching big tech and media companies on a sale. Founded in late 2004, the site exploded early in 2005 when a user posted a link to Paris Hilton’s hacked cell phone information on Digg, resulting in a surge of traffic that made people realize the enormous appeal of this simple creation. It has raised $11.3 million in funding since then!

The recent news from sources very close to the Digg-Sale deal reveal that four companies are in heavy due diligence with Digg - two media/news companies, and two big Internet companies - Google and Microsoft. And Google and Microsoft are on the verge of making their bids.

Digg is prepared to take less than the $300 million Allen & Co. were floating late last year. Google is expected to bid $200-$225 million, which Digg, I think, would willingly accept! Microsoft might be looking at a somewhat lower price, which is obvious as most of Digg’s revenue today comes from a three year advertising deal that Digg signed with Microsoft last year. That deal has revenue guarantees, and Microsoft may be hesitant to value Digg based on revenue that they supply.

Any sale is likely to give Microsoft an option to terminate that advertising deal, which means Google isn’t valuing Digg based on revenue, either. But Google can certainly generate revenue on all those page views on Digg, not to mention it just cannot afford to lose a market chunk to Microsoft at this time!!

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