Okay, Microsoft, Now What?

By  |  Monday, May 9, 2011 at 10:56 pm

It’s not yet public, but Kara Swisher says it’s confirmed: Microsoft is buying Skype, apparently for $8.5 billion, and apparently with the intention of linking the famous, popular, and unprofitable Internet telephone service with its Windows Live offerings. Kara reports that the deal–which would be Microsoft’s largest ever–will be announced tomorrow morning, conveniently grabbing headlines during the first morning of Google’s IO conference.

Maybe you think the acquisition is a no-brainer, but I suspect that the general initial consensus among non-Redmondians is that it’s an awful lot of money to spend on a company that’s likely to give Microsoft heartburn as it tries to digest it. It’ll be intriguing to see if the formal announcement includes a coherent explanation of why this makes sense: you’d think that part would be easy if Microsoft itself has figured out why this is a good idea.

For now, I’m thinking about the last time a big company bought Skype (albeit for a lot less money) based on the promise of powerful synergies and new opportunities. Let’s read a 2005 press release, shall we?

eBay to Acquire Skype

London, September 12, 2005 – eBay Inc. (Nasdaq: EBAY; www.ebay.com) has agreed to acquire Luxembourg-based Skype Technologies SA, the global Internet communications company, for approximately $2.6 billion in up-front cash and eBay stock, plus potential performance-based consideration. The acquisition will strengthen eBay’s global marketplace and payments platform, while opening several new lines of business and creating significant new monetization opportunities for the company. The deal also represents a major opportunity for Skype to advance its leadership in Internet voice communications and offer people worldwide new ways to communicate in a global online era. Skype, eBay and PayPal will create an unparalleled ecommerce and communications engine for buyers and sellers around the world.

“Communications is at the heart of ecommerce and community,” said Meg Whitman, President and Chief Executive Officer of eBay. “By combining the two leading ecommerce franchises, eBay and PayPal, with the leader in Internet voice communications, we will create an extraordinarily powerful environment for business on the Net.”

Founded in 2002 by Niklas Zennström and Janus Friis, Skype offers high-quality voice communications to anyone with an Internet connection anywhere in the world. The Skype software is easy to download and install, and enables free calls between Skype users online. Skype’s premium services provide low-cost connectivity to traditional fixed and mobile telephones. Skype’s software also offers a robust set of features, including voicemail, instant messaging, call forwarding and conference calling. Upcoming product innovations include Skype video, expressive content such as avatars, and customized toolbars for Outlook and Internet Explorer.

One of the fastest growing companies on the Internet, Skype already has 54 million members in 225 countries and territories. Skype is currently adding approximately 150,000 users a day and has created a thriving ecosystem of products, services, developers, and affiliates. Skype is considered the market leader in virtually all countries in which it does business. In North America alone, Skype has more users and serves more voice minutes than any other Internet voice communications provider.

“Our vision for Skype has always been to build the world’s largest communications business and revolutionize the ease with which people can communicate through the Internet,” said Niklas Zennström, Skype CEO and co-founder. “We can’t think of any better platform to fulfill this vision to become the voice of the Internet than with eBay and PayPal.”

“We’re great admirers of how eBay and PayPal have simplified global ecommerce and payments,” said Janus Friis, Skype co-founder and senior vice president, strategy. “Together we feel we can really change the way that people communicate, shop and do business online.”

Zennström and Friis will remain in their current positions. Zennström will report to eBay CEO Whitman and join eBay’s senior executive team.

A Powerful Ecommerce and Communications Engine

Online shopping depends on a number of factors to function well. Communications, like payments and shipping, is a critical part of this process. Skype will streamline and improve communications between buyers and sellers as it is integrated into the eBay marketplace. Buyers will gain an easy way to talk to sellers quickly and get the information they need to buy, and sellers can more easily build relationships with customers and close sales. As a result, Skype can increase the velocity of trade on eBay, especially in categories that require more involved communications such as used cars, business and industrial equipment, and high-end collectibles.

The acquisition also enables eBay and Skype to pursue entirely new lines of business. For example, in addition to eBay’s current transaction-based fees, ecommerce communications could be monetized on a pay-per-call basis through Skype. Pay-per-call communications opens up new categories of ecommerce, especially for those sectors that depend on a lead-generation model such as personal and business services, travel, new cars, and real estate. eBay’s other shopping websites — Shopping.com, Rent.com, Marktplaats.nl and Kijiji – can also benefit from the integration of Skype.

PayPal and Skype also make a powerful combination. For example, a PayPal wallet associated with each Skype account could make it much easier for users to pay for Skype fee-based services, adding to the number of PayPal accounts and increasing payment volume.

In addition, Skype can help expand the eBay and PayPal global footprint by providing buyers and sellers in emerging ecommerce markets, such as China, India, and Russia, with a more personal way to communicate online. And consumers in markets where eBay currently has a limited presence, such as Japan and Scandinavia, can learn about eBay and PayPal through Skype. Skype can also help streamline cross-border trading and communications.

With its rapidly expanding network of users, the Skype business complements the eBay and PayPal platforms. Each business is self-reinforcing, organically bringing greater returns with each new user or transaction. The three services can also reinforce and accelerate the growth of one another, thereby increasing the value of the combined businesses. Working together, they can create an unparalleled engine for ecommerce and communications around the world.

Transaction and Financial Information

eBay will acquire all of the outstanding shares of privately-held Skype for a total up-front consideration of approximately €2.1 billion, or approximately $2.6 billion, which is comprised of $1.3 billion in cash and the value of 32.4 million shares of eBay stock, which are subject to certain restrictions on resale.

The maximum amount potentially payable under the performance-based earn-out is approximately €1.2 billion, or approximately $1.5 billion, and would be payable in cash or eBay stock, at eBay’s discretion, with an expected payment date in 2008 or 2009. Skype shareholders were offered the choice between several consideration options for their shares. Shareholders representing approximately 40% of the Skype shares chose to receive a single payment in cash and eBay stock at the close of the transaction. Shareholders representing the remaining 60% of the Skype shares chose to receive a reduced up-front payment in cash and eBay stock at the close plus potential future earn-out payments which are based on performance-based goals for active users, gross profit and revenue.

The above-mentioned dollar and eBay share amounts are approximate, based on the Euro-Dollar exchange rate and eBay’s stock price as of September 9, 2005. The final value of the stock component of the consideration may vary significantly from this estimate based on the value of eBay stock at closing.

Skype generated approximately $7 million in revenues in 2004, and the company anticipates that it will generate an estimated $60 million in revenues in 2005 and more than $200 million in 2006. For Q4-05, eBay expects the acquisition to be dilutive to pro forma and GAAP earnings per share by $0.01 and $0.04 respectively. For the full year 2006, eBay expects the transaction to be dilutive to pro forma and GAAP earnings per share by $0.04 and $0.12 respectively, with breakeven on a pro forma basis expected in the fourth quarter of 2006. On a long-term basis, eBay expects Skype operating margins could be in the range of 20% to 25%.

The acquisition is subject to various closing conditions and is expected to close in the fourth quarter of 2005.

 
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4 Comments For This Post

  1. @jmproffitt Says:

    Microsoft's track record with anything that isn't Windows or Office is pretty awful. And their track record with online services is cringe-inducing, especially financially.

    They've got a stable of telephony tech — Lync, Messenger, Tellme, Windows Phone 7, and now apparently Skype — that could turn into something, especially since business premises telephony is so painfully behind the times, but my question is can Microsoft pull it off? This just isn't their strong suit. They could call it Office Live Talk or Windows Phone Everywhere or whatever you like, but would it catch on?

    Om Malik has also made the point in his coverage that Skype is populated with a lot of mercenary talent right now — mercenaries likely to bolt after an acquisition. Sure, that lets Microsoft get more control faster, but will a third incarnation of Skype be profitable when the first two weren't?

    This move screams of sweaty Ballmer desperation and looks, on the surface, like a losing play.

  2. The_Heraclitus Says:

    I thought that WindowsLive was, dead.

  3. Gerald F. Shields Jr. Says:

    Best Bet: Microsoft should keep the Skype name and brand. Moreover, they should not insist on integrating any Microsoft Technologies into Skype yet or vice versa. In other words, let Skype operate on its own, before doing anything with them.

  4. IT Rush Says:

    Actually, looks like it's already sold for 8.something? hoping to hear more features after this selling thing..