By Bill Rigby

SEATTLE (Reuters) - Microsoft Corp agreed to buy online social network firm Yammer Inc for $1.2 billion in cash, which will allow the software company to offer a service like Facebook Inc's to corporate customers.

Talk of a deal had circulated earlier this month, but the two companies only confirmed an agreement on Monday.

Four-year-old Yammer, which has 5 million users of its private, in-company social networks, helps companies' internal communications and collaboration by allowing employees to form groups and interact with each other freely. Companies such as Ford Motor Co, Supervalu and Deloitte are customers.

The 400-employee firm will keep its headquarters in San Francisco but will become part of Microsoft's Office unit under Kurt DelBene in Seattle. Yammer will still be led by current CEO David Sacks, a former PayPal executive.

The service should fill a growing gap that Microsoft was struggling to fill with its SharePoint application for creating private websites for intra-company projects.

"This acquisition will immediately make Microsoft a strong competitor in the enterprise social market," said Larry Cannell, an analyst at tech research firm Gartner. "It was a stretch to call the capabilities in SharePoint's MySite feature a social network site."

With Yammer, employees can use a private, online company directory to contact co-workers, form networks, chat, share links and post news. A basic version of Yammer is free, but a subscription buys more security and integration with other company-wide software. Yammer's subscription-based business model makes it different from ad-driven network companies like Facebook or LinkedIn Corp.

The deal, which values Yammer's users at about $240 each, may ignite interest in companies offering similar services, such as Salesforce.com Inc, Jive Software Inc and Telligent.

The area of internal networking for companies has attracted other big tech companies such as Cisco Systems Inc, which has a similar offering to Yammer called WebEx Social, and International Business Machine Corp with a rival product called Connections.

Microsoft, which owns a small fraction of Facebook shares, has been looking for ways to make its desktop-bound products more interactive and attractive to its core corporate users and home consumers, and has even been experimenting with its own social network called So.cl (pronounced 'social').

Last year it paid $8.5 billion to buy online chat company Skype, which it is integrating into its offerings, including the next version of Office.

Microsoft's Office suite of applications - including Outlook email, Excel spreadsheets and PowerPoint presentation program - is the bedrock of most companies' day-to-day working software.

The Office unit is Microsoft's most profitable, contributing 60 percent of its profit last year, and amassing more sales than its flagship Windows operating system.

Microsoft closed down 2.7 percent at $29.86 on Nasdaq.

(Additional reporting by Sayantani Ghosh. Editing by Gerald E. McCormick, Tim Dobbyn and Bernard Orr)