Skype and Microsoft: Mirage or Dynamo Duo?

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By EconMatters

As global economy slowly recovers from the Great Recession, market confidence starts to return, Microsoft finally decided to join the M&A party and made the biggest acquisition in its 36-year history—paying $8.5 billion cash for the Internet telephone service Skype Technologies SA from eBay and a group of private equity investors including Silver Lake Partners.

eBay, Inc. who acquired Skype in a 2005 deal valued at around $3.1 billion, sold about 70% of Skype to the private group at a loss in 2009 after failure to integrate Skype into its eCommerce model. That left eBay with a roughly 30% ownership in Skype.

Although Microsoft is well known for its deep pocket with around $50 billion cash on hand, from a valuation standpoint, the deal is pricey as Skype makes no money, despite 663 million registered users. In 2010, Skype had revenues of $860 million and posted a net loss of roughly $7 million. Analysts have estimated Microsoft is paying roughly $1,000 per Skype user, while each user represents only about $30 in profit.

Furthermore, Microsoft’s reportedly paid more than twice of the next highest bid at around $4 billion by Google. (Facebook is said to be one of the suitors, and Cisco also was rumored to be in talks with Skype last year.)

The potential strategic synergy is definitely intriguing. Microsoft stated in its press release that the plan is to integrate Skype with Microsoft's existing Lync, Outlook, Xbox Live, Kinnect and Windows Phone. With Microsoft jumping on the mobile wallet bandwagon , this deal could potentially increase Microsoft’s competitiveness against both Apple and Google in the mobile arena.

So far, from a technology integration point of view, some of the technology sites such as Wired and ZDnet have called the Microsoft-Skype marriage basically a big blunder on Ballmer’s part , while a few financial analysts believe Microsoft will get its money’s worth ..…eventually.

In our opinion, strategic vision is just a mirage without the critical path of successful execution, which Microsoft has had a pretty bad track record based on its past big acquisitions. We think Microsoft most likely is in it mainly to lock out rival Google’s access to Skype, with strategic integration a secondary consideration.

Moreover, Microsoft seems a little too late in the tech game, even if (a big IF without an overhaul of its organizational structure and the executive team) Microsoft could “learn the lesson” from past mistakes to succeed where eBay has failed.  So the skype deal has not changed our view that Microsoft is a 'cash cow,' instead of a typcial tech growth stock, and remains one of the five dead money plays in the tech sector , from an investment perspective.

For now, the biggest beneficiaries of the Microsoft-Skype union are the equity investors (eBay, Silver Lake Partners, et al), and the two founders of Skype--Niklas Zennstrom and Janus Friis (double dipping from two separate sales to eBay and Microsoft.)  Facebook could also end up getting the benefit of Skype technology without paying a penny as Microsoft is one of its investors. 

It'll be interesting to see how Microsoft integrates and markets Skype services. Meanwhile, check out the infographic at our blog detailing Skype’s Cinderella rags to riches of eBay and Microsoft.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: News Headlines , Technology , Investing Ideas , Stocks

Referenced Stocks: AAPL , CSCO , EBAY , GOOG , MSFT

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