Microsoft Acquires Skype For $8.5 Billion [ANALYSIS]

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Skype acquisition efforts are turning out to be more fascinating with every passing day. Last week speculations were made favoring Facebook to ‘shake hand’ with Skype, then Google fuel the fire by showing interest in Skype and yesterday technology giant Microsoft has jumped into the acquisition race.

As per the latest information from various sources, it’s Microsoft who is quite close to grab Skype by shelling out somewhere between $7 billion to $8 billion in cash and stocks. Microsoft’s latest move, apparently, has switched off Google and Facebook. Representatives for Microsoft and Skype declined to comment.

Buying Skype – service which connects millions of people across the globe through Internet-based voice & video – would give Microsoft much-needed hype in Internet space especially when it comes at the time Google and Facebook are already stamping their dominance effectively.

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Is Microsoft Overpaying Skype?

Just evaluate these figures: Skype’s last year revenue was 860 million. Consequently, operating profit stood $264 million but on net-to-net it lost $7 million. The company also had long-term debit of $686 million as of December 31 last year. A company which holds more than 675 million users base still struggling to find a positive profit figure as net income – Surprising!

If Microsoft agrees to pay close to $8 billion, it’s nine times of Skype’s last year revenue and 30 times of operating profit. Do all such calculations on business sheet really make any profitable sense for a company which has failed to give single master class over the Internet till such date?

If Microsoft pocket Skype with whooping $8 billion, it will be the biggest ever acquisition in the history of the company. n 2007, Microsoft paid about $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for Yahoo Inc. nearly three years ago. Yahoo is valued at half that sum today.

Can Microsoft Capitalized On Skype Services?

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Post acquisition efforts and strategy are already on the cards of Microsoft. This we can confirm because, unlike Google and Facebook, company is not shielding itself behind any investment or advisory firm for Skype acquisition exercise.

Microsoft has never been known as communication oriented company. For a company which leads all the way in Office and Desktop enterprise business, it would be a daunting task if Skype couldn’t scale up in next 6-8 months of post-acquisition.

On the bigger note, many are predicting higher chances of execution failure if Microsoft overcomes Skype. To justify the buyout investment and to make Skype work Microsoft will have to transform Skype for an enterprise business solution which will not only challenge Cisco’s WebEx but also draw the possibilities to go with company’s enterprise solutions. However, in such transformation era, Microsoft will also have to make sure the Skype’s current market with consumers who want to bypass the traditional phone companies and their outrageous bills.

So, what about windows Phone platform? That aspect is much more interesting for this acquisition. Recent marriage between Microsoft and Nokia has already raised the expectations of management from both companies. Therefore, it’s very important for Microsoft to offer an exponential software platform with feature rich “bolt-ons” to Nokia which can largely compete with Andorid and iPhone.

Skype is already enjoying the attention from Android and iPhone users due to seamless integration of its Voice & Voce conference facilities. If Microsoft manages to control Skype, besides having direct advantages for its Windows platform, it would be able put both the companies (Apple and Google) in damage control mode – till an extent.

It’s not the first time when Skype is going through such acquisition exercise. Founded in 2003 by Niklas Zennstrom and Janus Friis, Skype was sold to eBay Inc in mid 2005 for $2.6 billion in cash and stocks. Industry as well as eBay was expecting to see surge in sales from the help of Skype service where sellers and buyers could have much effective discussion over transactions. However, eBay was flat in execution and finally surrendered it by giving away 70% of stake to a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board, who will make a handsome return on the Microsoft transaction.

Now, when Microsoft is, apparently, going to control Skype, it would be interesting to see how company leverages on Skype’s legitimate capabilities by having seamless integration with enterprise and Internet wings.

UPDATE: WSJ reports that Microsoft will announce acquisition of Skype for $8.5 billion later this morning at 8 am ET ( 6 pm IST today)

UPDATE 2: So, the big news is out finally. Microsoft has agreed to pay $8.5 billion in cash against take over of Skype. In the statement Microsoft said that Skype currently has 170 million active users, out of which 8.8 million are those who are paying for the services. The new acquisition will work as a separate business division and would be known as “Microsoft Skype”. Current Skype CEO Tony Bates will continue as a president of the new division and will directly report to Steve Ballmer – Microsoft CEO.

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