No new news that Microsoft bought Skype for $8.5 billion on Tuesday. Reactions were generally negative, mostly because the deal doesn’t make any sense at all.
First of all, Skype is losing money even after all their success. They lost $7 million on $860 million revenue last year even after a 40% user base expansion, making investors skeptical that Microsoft can make this deal worthwhile. Even if Skype grows another 40% next year thanks to being incorporated with Xbox Live and Microsoft Office, and begins to turn a modest profit (it would be impressive if they could get to a $15 million profit), it would still take Microsoft the better part of a century to get their money back.
Second, justifications for the deal didn’t make sense. Some analysts noted that Microsoft was holding at least $50 billion in cash overseas, and this purchase was a way to avoid moving it through the U.S. I imagine most investors would prefer that the company had just paid dividends and a tax, however, rather than buy a company losing money. Another article pointed out that the price per user acquired was much lower than the price Microsoft paid per user to invest in Facebook. That makes no sense either: Facebook is profitable, and Microsoft didn’t “acquire” any users in the Microsoft investment. Totally different transactions. Unless Microsoft can turn Skype into a profitable enterprise, which there is reason to be skeptical of, any price per user was potentially too high.
Third, apparently Microsoft didn’t use an investment bank in the deal. Anybody who thinks they paid too much would roll their eyes: of course they didn’t, or they wouldn’t have overpaid! The article notes that both the I-banks that Microsoft normally uses AND Skype’s I-banks lost out, because Skype was about to go IPO and pay them a big fee. More reports suggest that Skype initially asked for $7 billion… So, how did Microsoft end up paying MORE than the price the other side started off asking for?
danielmarkmiller.net 