Microsoft have agreed to spend $1.2 billion on buying Yammer, a social networking firm targeted towards businesses.

Microsoft shares dropped 2.7% to close at $29.86 after the deal was announced. Yammer allows companies to set up social networking sites for their business demands. Their employees can then sign up for free with the businesses able to spend for an upgrade for more features.

According to Microsoft, Yammer has already 5 million corporate users on hand. Steve Ballmer, the CEO of Microsoft says that Yammer will help the “growing portfolio of complementary cloud services.”

Forrester Research analyst Rob Koplowitz said on his blog that Microsoft can “position Yammer as part of a broad horizontal collaboration offering.”

“This would mean that Microsoft, in one fell swoop, becomes good at social and places it adjacent to their very strong market offerings in email, unified communications, workspaces, etc. If Microsoft plays their cards right, they seriously cripple the ability for competitors to disrupt their market-leading position in collaboration, and likely place themselves as long-term leaders in enterprise social.”

Kitguru says: Microsoft are driving expansion this year. They hope their Windows 8 tablets will also find a home in many a business environment.

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