EBAY SELLS SKYPE TO MICROSOFT & MICROSOFT ARE HAPPY

Think Microsoft’s biggest deal ever

is a mistake? Think again. Skype me…

On the surface Microsoft’s $8.5 billion deal to buy the Internet phone company Skype sounds loopy. But don’t be deceived: This just might be the smartest move Chief Executive Steve Ballmer has ever made.

It isn’t hard to see why you might think otherwise. In 2005 eBay acquired Skype for $2.6 billion. Failing to integrate the service into its e-tailing business, eBay in 2009 sold 70% of Skype for a little over $2 billion to a group made up of Marc Andreessen’s venture firm, the Canada Pension Plan system and Skype’s founders, among others; the valuation was little changed from the first time it sold. Ergo, the idea that Microsoft would pay $8.5 billion for the same company less than two years later sounds, uh, startling.

It doesn’t help that the company has a mediocre track record when it comes to acquisitions. Microsoft has closed just a handful of major deals–aQuantive, Great Plains Software, Navision, Hotmail–and none has changed the face of the company. Microsoft lacks a clear Internet strategy, and its online business operates in the red. Bing is gaining share, but even counting its venture with Yahoo it has only 30% of the domestic search business. Not least, Microsoft’s share price is unchanged over the last decade (despite impressive revenue growth), thanks to concerns that Windows and Office are threatened by mobile devices and Internet-based applications. With that backdrop, Microsoft’s willingness to pay nearly ten times 2010 revenues for Skype appears illogical or worse.

But I think it will prove to be genius. Here are three reasons this deal should turn out to be a huge success:

– It uses some of Microsoft’s mountain of offshore cash. Microsoft finished the March quarter with $50 billion in cash and short-term investments–$ 42 billion of that held outside the U.S. Like many American technology companies, Microsoft generates most of its revenues outside the country. Bringing it home would mean handing Uncle Sam a 35% cut. So the cash sits offshore, where it can’t be used to buy back stock, pay dividends, hire American workers or acquire U.S. startups. Apply a 35% discount to the $8.5 billion price tag–that’s what would happen if it sent the cash to Redmond–and the deal looks a lot more reasonable, at around $5.5 billion posttax. And Microsoft still has a lot more cash overseas than it does at home; expect more non-U.S. acquisitions in the months ahead.

– Microsoft gets one of the truly dominant Internet brands. There are only a handful–Google, Facebook, Netflix, Craigslist, Wikipedia, Twitter–but most aren’t for sale, and none belongs to Microsoft. Skype is the dominant player in Internet audio and video communications–people use “Skype” as a verb–and now Microsoft owns it.

– Ignore the pundits; this is an enterprise- software play. The knee-jerk reaction has been that Microsoft will need to up the revenue generated by Skype via more aggressive use of advertising and integration with gaming. But the deal is really about “unified communications,” in which Microsoft is competing with Cisco and others. The theory is that by adding Skype’s audio, video, conferencing and telepresence features to the mix Microsoft will offer an unbeatable combination of features that every enterprise will want. Microsoft sees unified communications as a multibillion-dollar business. Don’t be surprised to see Microsoft abandon its current unified communications branding–Microsoft Lync–and rechristen the product Skype for the Enterprise.

In one brilliant stroke Microsoft dipped into its growing overseas cash pile, bought an iconic brand and set the stage for another multibillion-dollar business. Worth every penny.

Sourced & published by Henry Sapiecha

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