Microsoft overpays for Skype

  
Microsoft acquires Skype for $8.5bn, becoming MS's largest acquisition. Quick history (with big numbers) associated with Skype:

• Skype was founded in 2003 by Swedish entrepreneur Niklas Zennström and Dane Janus Friis
• In October 2005, EBay outbid Google and Yahoo! Inc. for the loss-making company and paid $2.6 billion for the privilege. (I thought that was madness then!)
• Zennström and Friis fell out with Ebay about patent licensing of some of the key technology in Skype (Truly incompetent due diligence from Skype - surely the IP should have been bundled into the acquisition?!?)
• In 2007, EBay wrote down the value of Skype by $900 million.
• EBay's CEO, John Donahoe, sold 70 percent of Skype to a consortium of investors (Silver Lake Partners, CPPIB, Andreessen Horowitz)  in November 2008 in a deal that valued Skype at $2.75 billion. 

Today

• Skype has 663 million global users (145m active users in an average month)
• Windows Live Messenger has 299 million accounts worldwide in June 2010. (Source: Microsoft by the numbers) 
• Skype is the largest international voice carrier and owns 13% international call market share (Source: Skype Commands 13 Percent of International Phone Calls)

The Deal

• Microsoft pays Skype for $8.5bn
• This marked a 300% increase in value for the company in the three years since the eBay write-down in October 2007.
• The price Microsoft agreed to pay for the company is 32 times Skype's operating profits
• EBay said it will reap more than a 50% return from the company’s $2.6 billion investment in Skype Technologies SA six years ago. (Source: Bloomberg)
• $14.70 is what Microsoft paid per user for Skype. When eBay bought Skype back in 2005, they paid $45.60 per user. (Source: 14 And 116: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype)
• 116 is the number of days until Microsoft makes the money back in operating cash flow. Microsoft had $26 billion in operating cash flow last year. So $8.5 billion works out to around 116 days of cash flow for Microsoft (Source: 14 And 116: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype)

Was the deal over valued?
Lots of respected analysts think that this was a fair investment by MS - given all the possible synergies between so many of Microsoft's products (Windows Phone 7, Kinect, Lync, etc.), but in my opinion they overpaid.

MS are no novices in any of this technology. Skype does have some advantages - intelligent routing for one (see Skype's explanation of its technology)
 
I think there are two logical reasons for this acquisition:

• User Base 166m users making international calls. By plugging Skype into WinMobile 7, it gives MS a way to get a bunch of well connected users making premium international calls from their mobiles. (IMHO, people avoid making international calls from their mobile phones because of its outrage expense.) This gives a neat way for operators whose users on WinMob phones to take voice calls off 3G data network and onto 2G voice network (See my post on 3 launches X-Series for how this could work.)
• Keeps Cisco from getting its hands on Skype Apparently Google came knocking, but was told the starting price was $7bn, but I think this would have muddied Andriod's strategy. An acquisition by Cisco could have seriously dented MS's interest in the enterprise unified communications market now and in the future. (Note that Skype's CEO Tony Bates is a former Cisco execs appointed in October last year.)

Some great blog posts on reasoning:

• ZDNet: Microsoft's purchase of Skype: One expensive game of keep away
• Microsoft Insider: Here's Why We Bought Skype