Why Microsoft Is Buying Skype for $8.5 Billion

206 Comments

Skype CEO Tony Bates

Skype CEO Tony Bates

Updated at 12 midnight. Microsoft has bought Skype for $8.5 billion, in an all-cash deal. The deal closed a few hours ago. is close to finalizing a deal to buy Skype for between $7 billion to $8 billion. The Wall Street Journal confirmed (s nws) the news after we had first reported it yesterday. The announcement is likely to come out later today or tomorrow morning, according to several reports. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates will host a press conference in a few hours.

Skype has been up for sale for some time, thanks to some very antsy investors. My sources indicated both eBay (s ebay) and Silver Lake Partners have been getting nervous about the delayed initial public offering and have been pushing for a sale of Skype. Facebook and Google (s goog) were said to be earlier dance partners for Skype, and Microsoft (s msft) was a late entrant and is now close to walking away with the prize.

It won’t surprise me if Microsoft comes in for major heat on this decision to buy Skype — and the software company could always botch this purchase, as it often does when it buys a company. The Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

I also don’t believe Facebook and Google were serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In essence, I feel Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

  • Skype gives Microsoft a  boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco (s csco) and Google.
  • It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.
  • It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.
  • However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia (s nok). The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.

Guess Who’s the Big Winner

The biggest winner of this deal could actually be Facebook. The Palo Alto, Calif.-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement, and you can expect it shortly.

Why Did Skype Want To Sell? 

Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skype’s revenues had stalled.

The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise.

So Who Made What?

  • Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. So in the end, eBay did make money on the Skype deal.
    Skype Founders

    The Skype Founders

  • Niklas Zennström and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion. Damn, these guys know how to double-dip!
  • Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion.
  • Andreessen Horowitz had three percent of the deal and made $205 million profit on their $50 million initial investment.

206 Comments

Hannibal

Despite all the angry, conflicting comments on here, I don’t think Skype will really change. At most, they’ll retire MSN Messenger and turn their heads to Skype as the next thing to improve, since MSN Messenger doesn’t have video/voice capabilities (you can record voice in MSN, sure, but only in clips). Personally, I don’t care about video/voice. I like MSN’s Journal capabilities so I can doodle and send handwritten messages to friends.

In other words, you guys are getting all heated up over nothing. I can virtually guarantee that nothing will happen–at least, not for a long time. ;P

kk

I think its a great strategy for Microsoft. The customer base alone is worth it; 600M users, spread over the world, primarily consumers, interworking alliances with Cisco and Avaya. Skype is probably the best implementation of Unified Communications out there. It could use some beefing up and this is where Microsoft can evolve the Skype product to be more robust with MS UC products. Skype also needs the capital to upgrade the Global Index from a proprietary implementation to SIP. This could make Microsoft the biggest Telecom Company in the world!!!

Ron

Hello.. I’m a new investor and I would appreciate if someone could tell me WHY MSFT shares are going down when infact it should be the other way considering that microsoft is adding a new business venture into their kitty.

Googling didn’t help, perhaps someone can help me to understand this.

StatSpotting

In any acquisition the buying company shares go down and the shares of the company being bought will go up. one reason is that acquisition always happens at a premium.

johne37179

Microsoft just made the hole they are digging for their grave $8 billion deeper.

lee

I like Skype,i hope they release BB version sometime soon…..

Robert

There’s a story going around that Groupon was also interested in Skype. They wanted to turn it into a global online video customer service network and name it Grypon.

Alex

“Google, with its Google Voice offering, doesn’t really need Skype.”

What does Google Voice have to do with VOIP? Nothing, that’s what. Google would love to own Skype.

Johan

No, I dont really see skype fitting with Google’s product suite. Not becasue it’s not a great product or that the user base wouldn’t be welcome but there would be real issues integrating it with the existing solutions which are already fairly advanced. I think that this will serve to push Google to put more resources at Google Voice and also make it easier to push governments internationally to allow for Google voice to be launched outside of US.

Robert Cathey

It’ll be interesting to see how well MSFT is prepared to handle the public relations on this announcement. Given their past success rate with large acquisitions, there are likely to be some tough questions about integration, technology leverage/integration and culture (mis) match.

Ranel San Andres

Yes, as we always say, “There is a tornado coming!”. This is a scary situation. Microsoft is already a giant – no need to buy anything on this planet. Why not Microsoft create their own? I think it’ll be more affordable.

Ranel San Andres

@Willam Valentine: So, do you mean that you support Microsoft for the bid? Skype will be tossed by Microsoft entirely if the deal would commence.

Richard

I know of a number of people living below the poverty line within the USA including my self who can not afford any other telecommunication other than Skype. $60 a year for my ph number and plan. Only phone I can afford. Hope this does not change now?? Very scary.

Joe

If this ia the case then I will be canceling my subscription with skype and looking elsewhere as I am totally against microsoft and their business plans. Hope this hurts you microCRAP

WoLf

You’re welcome to hurt yourself as much as you want by not using it.. the rest of the world doesn’t care.

Jackie Lu

MSN has a bad reputation both on voice service and video service via instant information, that is what MS needs to impove. It is a good deal for MS, but too expensive…

Om Malik

Money is not that big an issue. I think it makes perfect sense for them to do something bold like this one.

Steve

Oh well, There goes the ability to run Skype on Linux! Guess it’s time to move to a different voip solution that will be Linux friendly.

joemamma

if linux is so great then why did you reply twice?

Steve

Oh well, There goes the ability to run Skype on Linux! Guess it’s time to move to a different voip solution that will be Linux friendly.

JohnM

as if that means anything….we all know the attitude M$ has towards non window$ platforms

George Bonev

from what i`ve seen the past 2 decades, M$ likes best and only monopoly.
It is hardly customer-care company and almost everything they put hands on doesn’t seem to function as initially intended.. Not to mention the quality of their own products (aka swiss cheese) for which they require payment from you to be made (NB! actual cheese – much cheaper).
for me goes like: goodbye skype, welcome gtalk and alternatives.

KISS \m/ – as long as profit is the engine – the soul will never be free.

Kristofer Thurston

Microsoft already has a strong presence in Enterprise voice, video, and sharing with Lync. With the acquisition of skype, I think Microsoft can tie that directly into the consumer communication market. If anyone at MSFT has the ability to see beyond the end of their noses (which is debatable on the consumer end), they could really drive the communications package home.

Om Malik

I think the whole ease of use is the key here. Also Skype is cross platform so that helps for sure.

Kristofer Thurston

could be a really good net product. Take the conference and presence management capabilities of Lync and cross it with the peer-to-peer nature of Skype and I think you’ve got a winner. Now Microsoft just needs a solid call control piece and I think they have a full platform.

Lucian Armasu

This deal reminds me of Nokia buying Navteq maps for 9 billion. They are still losing a lot of money from that deal each year and there’s no chance of ever getting back that money. When companies feel threatened and become desperate they make stupid deals like these and they overspend.

Deals this large should almost never be made because they almost ways turn out to be a failure. You should know that, Om. Skype was already on a decline. I can only see Microsoft accelerating that decline.

Glenn Fleishman

I was trying to do the math of the eBay deal, but I don’t know how much they sunk during their four-year ownership. They paid $2.6bn in 2005, sold 70% of that in 2009 for $2b in cash and commitments, and then will get $2.4bn or so from this deal. They already wrote down and absorbed the loss from the sale. Ostensibly this puts them $1.8bn up less the debt they ate during operations.

Ricky B.

Yeouch. I guess that finally settles the question of “when will Skype for Linux pass version 2.0?”

Never.

:(

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