Microsoft (MSFT) announced that they will buy Internet company Skype for $8.5 billion after the assumption of debt. This is the biggest acquisition in the company’s history, ahead of its 2007 purchase of online advertising company aQuantive for $6 billion. The price is certainly steep (roughly 10x sales) for a profitless company, and one that was purchased for 70% less six years ago by eBay (which sold a 65% stake in 2009 to a group of PE/VC firms). With the price in question, the company’s integration in the Microsoft system isn’t catching rave reviews either; here is what Charles Arthur, technology editor at the Guardian, had to say:
“After paying $8.5bn for Skype, what will Microsoft end up with? In a few years, I forecast it will be this: $8.5bn less in its bank accounts, a cats-in-a-bag fight between its Office division and its Online Services division over integration of the service, little – if any – kudos from consumers, and no appreciable effect on its bottom line.
That's right: Steve Ballmer, Microsoft's chief executive, might as well have put the money on a bonfire for all it's going to do for the company's share price, which has barely shifted in his 11-year tenure… It's about Ballmer's long-term aim to make Microsoft back into a hit brand with consumers, a position that it last held with the launch of Windows 95 in August 1995.”
There are a whole slew of negatives that Mr. Arthur sees from this deal. On the positive side, he can only imagine two ways this works for Microsoft. The first is a couple years down the road, when everybody has a smartphone in their hands, and can do voice-over-internet calls via Skype. The second is Skype integrated in Office, which could be a lock on businesses that already use the service (for voice and video conferencing capabilities).
When we get to hear management talk about the deal (press conference scheduled for 11 a.m. today), it should hopefully provide us with a better picture for the merits of this acquisition. The market has responded negatively, sending shares more than 2% lower in pre-market trading.
When all is said and done, this certainly teaches me a lesson about why investors without extensive experience in the industry should shy away from technology. When PepsiCo (PEP) bought Wimm-Bill-Dann, I had a good idea what I was paying for, and whether or not the deal made sense; the same can be said for when Johnson & Johnson (JNJ) recently bought Synthes. With the Skype deal, I'm left to value eyeballs, synergies and future expectations – three things I'm decidedly poor at deciphering or putting a number on. In the end, management better present a pretty convincing argument for why Skype, and why now.
“After paying $8.5bn for Skype, what will Microsoft end up with? In a few years, I forecast it will be this: $8.5bn less in its bank accounts, a cats-in-a-bag fight between its Office division and its Online Services division over integration of the service, little – if any – kudos from consumers, and no appreciable effect on its bottom line.
That's right: Steve Ballmer, Microsoft's chief executive, might as well have put the money on a bonfire for all it's going to do for the company's share price, which has barely shifted in his 11-year tenure… It's about Ballmer's long-term aim to make Microsoft back into a hit brand with consumers, a position that it last held with the launch of Windows 95 in August 1995.”
There are a whole slew of negatives that Mr. Arthur sees from this deal. On the positive side, he can only imagine two ways this works for Microsoft. The first is a couple years down the road, when everybody has a smartphone in their hands, and can do voice-over-internet calls via Skype. The second is Skype integrated in Office, which could be a lock on businesses that already use the service (for voice and video conferencing capabilities).
When we get to hear management talk about the deal (press conference scheduled for 11 a.m. today), it should hopefully provide us with a better picture for the merits of this acquisition. The market has responded negatively, sending shares more than 2% lower in pre-market trading.
When all is said and done, this certainly teaches me a lesson about why investors without extensive experience in the industry should shy away from technology. When PepsiCo (PEP) bought Wimm-Bill-Dann, I had a good idea what I was paying for, and whether or not the deal made sense; the same can be said for when Johnson & Johnson (JNJ) recently bought Synthes. With the Skype deal, I'm left to value eyeballs, synergies and future expectations – three things I'm decidedly poor at deciphering or putting a number on. In the end, management better present a pretty convincing argument for why Skype, and why now.
