As we discussed this morning – Microsoft to buy Skype? – the $8.5b deal was officially announced today.
I have three very different reactions to this:
1 – Wow. What a fantastic deal
For Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz this really is the ‘PE Deal of the Century’. To make 3x your investment in 18 months is pretty fantastic. But it is the scale of the gain which makes you gasp. Silver Lake invested c$1b which it has turned into over $3b in a very short period. We are unaware of any other PE investment to have made that magnitude of a gain in that short time. It was Silver Lake’s largest single investment ever. Their MD Egon Durban said "We had the courage and conviction to invest when no one was investing capital." To read more see the WSJ Skype investors reap a windfall.
2 – Wow. They paid how much?
On almost every criteria known in M&A, Microsoft paid a very rich price. Skype may have over 660m users but only 8.8m pay anything for the service. Skype has never made a profit. In 2010 it recorded a loss of $7m on revenues of $860m – $1.30 per registered user a year. Paying $8.5b – ie 10x 2010 revenues - for this was, as Durban said “a very compelling offer. When you have an opportunity to do one of the great deals in the history of the industry it is hard to turn down.”
3 – Wow. How long will it take Microsoft to ‘mess’ it up?
Actually that was the polite wording of the question I was asked by the CEO of one of the leading UK telco companies tonight.
I have said often that I saw Facebook as the ‘natural’ home for Skype. Indeed I see Skype being very synergistic to social networking. Microsoft is (so far) a non-runner in that game. Microsoft has said that they will use Skype in Outlook. This makes real sense- particularly with the rapid takeup of video calling within the industry and Skype in particular. But Outlook is very Enterprise-centrix - whereas the area where Microsoft needs to grow is with consumers. Microsoft will also use Skype in the Xbox - but that is still a small subset of the consumer market. Exactly how it plays or helps their mobile strategy – next year with Nokia on board– is less clear. The one thing that the telco (mobile and fixed) operators hate is VOIP calls. Already AT&T and Verizon are squealing.
Of course, Skype does give Microsoft a huge client base. Except (as I said above) it’s a non-paying base. It’s also the kind of maverick base that won’t take kindly to being bundled into Microsoft. Skype is also quite easy to copy. I can see Facebook creating an organic version for a fraction of the price Microsoft paid – and collecting a lot of users quickly. Same might apply to Google.
On top of that Microsoft doesn't exactly have an exemplary record in the M&A stakes. Just look at their last big purchase - $6b for aQuantive in 2007. Many suggest Microsoft paid too much there too and are yet to see the real benefit.
The markets seemed to give the deal a ‘thumbs down’ too. Microsoft shares were off c1% tonight. The media is full of sceptical reports. Microsoft clearly has a lot more to do to convince both users and shareholders that this is a wise move.