Microsoft in shock $8.5bn swoop for Skype

Published on Monday 9 May 2011 22:54

MICROSOFT yesterday stunned the technology world by announcing plans to buy internet phone service Skype for $8.5 billion (£5.2bn) as it seeks to regain ground lost to rivals Google and Apple.

The blockbuster deal, which represents the software giant's largest acquisition ever and the sector's biggest for years, will also spark huge windfalls for the owners of the Luxembourg-based business which has 660 million customers worldwide.

Microsoft outbid Google and Facebook, which are understood to have offered to partner or buy Skype for $3bn to $4bn.

The price agreed heightened talk of a growing bubble in technology company valuations, coming just days after business social networking site LinkedIn valued itself at around $3bn when it announced plans for an initial public offering.

While the $8.5bn price-tag surprised analysts, Microsoft chief executive Steve Ballmer said the deal demonstrated that it was "a super-ambitious company".

Microsoft's interest in Skype stems from a need to gain new customers for its Windows and Office software. Skype has 145 million users on average each month and has gained a strong following among small business users which Microsoft will look to tap into.

Skype's owners, led by private equity firm Silver Lake, are expected to have made more than three times their investment - a total capital gain of more than $5bn - in just 18 months. But shares in Microsoft fell in early trading as investors digested the scale of the deal. Michael Clendenin, managing director of consulting firm RedTech Advisors, said: "If you consider Skype was valued at about $2.5bn 18 months ago when a chunk was sold off, then $8.5bn seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a necessary lynchpin for the company's online and mobile strategy." .

Andrew Bartels, an analyst at Forrester Research, said: "It doesn't make sense at all as a financial investment. There's no way Microsoft is going to generate enough revenue and profit from Skype to compensate."

But Ben Horowitz, of venture capital firm Andreessen Horowitz, which is one of Skype's shareholders, described the deal as a "smart move" by Microsoft.

He said the combination will give Skype and Microsoft the competitive might to combat Google and the Facetime video chat function from the Apple iPhone.

Skype, which was formed in 2003, was bought by eBay in 2005 for $3.1bn. Last year it had $860m in revenue but posted a net loss of $7m. In 2009, eBay sold a majority stake in Skype to a group of investors for $1.9 billion in cash.The company, which allows people to make calls at no charge but has also developed premium services, would also give Microsoft a foothold in the potentially lucrative video-conferencing market as businesses shift to lower-cost ways of communicating.

Skype could be combined with Microsoft software such as Outlook to appeal to corporate users, while the voice and video communications could link to Microsoft's Xbox live gaming products. Longer term, Skype would offer Microsoft another route to develop its mobile presence, an area it has already put more energy and resources into as PC usage comes under threat.

Skype, which was advised by Goldman Sachs and JPMorgan on the deal, will become a new business division within Microsoft with Skype chief executive Tony Bates in charge and reporting directly to Ballmer.

The two companies hope the deal will be completed later this year after regulatory approval.