Tuesday, May 10, 2011

Microsoft + Skype = Stupidity?

This morning, Microsoft announced it would be acquiring the video communications company Skype in a behemoth of a $8.5 billion deal. While on paper it looks like a strategic acquisition, I am growing more disgusted by more details I find out about it. The acquisition makes sense -- but absolutely not for $8.5 billion...even if you're cash-rich like Microsoft.

Let's first look at the positives before the negatives. The potential of integrating Skype into Microsoft's current product offerings is enormous (in M&A terms, the potential "synergy" is immense). So in one way, Microsoft has much to benefit from the acquisition:
  1. Skype has a massive user base, in addition to a well-recognized brand name. More and more people are turning to Skype as a means of long-distance communications. Microsoft can tap into this user base, which is mostly different from its major corporate clientele.
  2. As Skype is based in Luxembourg, Microsoft can use the cash on its foreign accounts to pay for the acquisition. How is this a positive? No tax has to be paid on the deal.
  3. Microsoft's product offerings are increasingly dependent on video ecosystems. For example, Xbox Kinect and Windows Phone systems can benefit much from video integration. This can make the different between customers choosing an Android or iOS device versus a Windows Phone.
  4. Synergy cost cutting. Both Skype and Microsoft are inherently software companies. Even though Skype had a net loss last year, it would not be difficult for Microsoft to integrate the core of Skype's business into itself without major costs.
Now that the positives of the deal has been outlined, let us turn to the negatives (muhaha!).
  • Price tag of $8.5 billion. This is a ridiculous sum of money for a company that had a net loss last year, was dumped by Ebay recently after a write-down, and purchased by a group of investors for $2.75 billion. I smell a conspiracy brewing here -- is Ballmer (CEO of Microsoft) being bribed to make this deal. This is especially true in light of speculation that Skype's IPO (initial public offering) would value the company at around $2 billion dollars. Why couldn't Microsoft waited?
  • It's all potential. This is the thing investors miss out on technology companies, that they are mostly based on potential outcome and not certainty. The same thing can be said about companies like Facebook -- there is no way such a firm can be valued at more than $10 billion. Technology changes so fast and the market is so competitive that popularity can deteriorate in a heartbeat (anyone remember MySpace?). Microsoft even has a bad history of purchasing companies that eventually flop big time.
  • Even if all the potential can be realized, I highly doubt it would be worth $8.5 billion in the long term. In the short term, this is a disaster deal.
All in all, this post has been my own perceptions of the Microsoft-Skype deal announced this morning. I am really glad I do not own any Microsoft shares -- nor do I plan on purchasing any thanks to these thick-headed moves. Heck, I might even buy...Apple instead.

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