The deal is done. Microsoft is buying Skype for $8.5 million in cash in its first sizeable acquisition since August 2008, when the Redmond software giant spent $486 million on Greenfield Online.
In fact, this is Microsoft’s biggest financial bet to date in terms of M&A, trumping its $6 billion+ purchase of aQuantive, which dates back to May 2007, in size.
The purchase price includes the assumption of Skype’s debt.
The agreement has been approved by the boards of directors of both Microsoft and Skype.
Skype will become a new business division within Microsoft, and chief exec Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Microsoft CEO Steve Ballmer.
The deal was first reported by GigaOM‘s Om Malik (he does that sometimes) and later confirmed by the Wall Street Journal, who cited people familiar with the matter.
The $8.5 billion question: did Microsoft overpay for Skype?
Perhaps, perhaps not. Only time will tell. As always with these things, the many tech industry pundits and analysts will look at this deal from all possible angles and then some, and still only a handful will end up being somewhat accurate when we look back in a couple of years.
From a non-financial point of view, the acquisition makes a ton of sense today, though.
Skype digitally connects dozens of millions of people on a daily basis, enabling them to communicate with each other through voice calls, chat messages and video conferencing.
There’s no doubt it’s a big brand on the Web (with both consumer and enterprise appeal, worldwide at that), and is poised to keep mattering in the next decade and beyond.
In August 2010, Skype filed to go public, expecting to raise $1 billion, but not long after appointing a new CEO, former Cisco SVP Tony Bates, the company put its IPO plans in the freezer while it looked for ways to generate more revenue from the popular service.
Skype’s 2010 revenue was $860 million, adjusted EBITDA was $264 million, and – as many are tripping over each others to point out – the company actually lost $7 million last year.
But looking ahead, chances for the business to keep growing, perhaps even acceleratingly so, are fairly big. In that sense, it’s a valuable asset to own (and to keep out of others’ hands).
The acquisition is subject to regulatory approvals and other customary closing conditions. Microsoft and Skype said they “hope to obtain all required regulatory clearances during the course of this calendar year”.
Since its former owner eBay sold the company to a consortium of investors formed by Silver Lake Partners, Joltid (the company founded by Skype’s original founders, Niklas Zennstrom and Janus Friis), the Canada Pension Plan Investment Board and Andreessen Horowitz in November 2009, the company has been pursuing an aggressive strategy to be available everywhere, anytime, both in enterprises, the living room, even classrooms and, very importantly, on smartphones.
Microsoft, of course, has the exact same ambitions of ubiquity, and Skype and recently acquired Qik fit nicely into many of its current product offerings: think Windows Phone (combined with Nokia), Xbox and Kinect, Bing, Office 365, Windows Live Messenger and other Live products, Lync, SharePoint, Internet Explorer, Azure, and so on.
The purchase also provides Microsoft with a wealth of p2p and collaboration technology expertise and intellectual property, an increasingly important asset to have these days.
It also brings reach: Skype’s user base is comparable to that of Facebook in terms of size (more than 600 million registered users, that is) and the social network in fact has tie-ins with Skype already on a product level.
Note that I’m not arguing in favor of the acquisition, but I can see the logic behind it.
Facebook was also said to be sniffing around Skype, according to multiple reports, but its interest in the VoIP company wasn’t nearly as profound as assumed, according to multiple sources close to the company. If you think about it, Zuckerberg and co didn’t really lose anything today (and remember: Microsoft is also a Facebook investor).
Whether you think the Microsoft deal makes sense or not, rest assured that companies like Google, Cisco and Apple, on the other hand, are not going to be too pleased about it. Not that either of them absolutely needed to own Skype, but in the hands of Microsoft it’s a much bigger threat to them than if it were still under eBay’s wings, or as a separate company.
As I wrote earlier, only time will tell if it will become indeed a significant threat, or a giant dud.