Microsoft set to buy Skype

Normal, Weekender

The National, Friday, May 13, 2011

MICROSOFT is on the verge of buying Skype for $8.5billion – despite the Internet phone service making a loss of $7million last year.
The deal would be the biggest in the 36-year history of the world’s largest software company. Microsoft has trailed Apple and Google in the mobile and Internet arenas.
Despite doubling sales and profit in the last eight years, Microsoft’s stock has mostly languished at the same level.
It has left investors worried about its ability to counter new rivals or adapt to new ways of computing.
For users the deal means Microsoft will integrate Skype into its array of corporate and home entertainment products.
Skype will support Xbox and Kinect, the company said, which could make for an interactive gaming experience that would link up players across the world.
But it could also be beneficial to the whole family for home schooling, one-on-one training and even patient care delivered remotely. 
Skype is also multi-platform, meaning it can reach into the world of Apple and can be paired with Windows Phone 7.
It could also get Microsoft’s Bing search engine in front of millions more people.
Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities but will also continue to ‘invest in and support Skype clients on non-Microsoft platforms.’
There are currently Skype apps for Linux, Windows and Mac OS X, Android, Blackberry, iOS and Symbian devices.
Skype was formed in 2003 by Niklas Zennstrom and Janus Friis in Luxembourg and originally sold to eBay in 2005 for $3.1billion.
At the time, it was thought that Skype calls could be used in auctions by bidders or sellers but the idea never materialised.
In fact even though Skype kept growing – who doesn’t like phone calls for free? – it didn’t make the money to go with the growth.
By 2009 eBay had had enough and sold 70 per cent of Skype to a consortium of investors: Silver Lake, Index Ventures, Andreessen Horowitz, a capital firm led by Netscape founder Marc Andreessen and Ben Horowitz; and the Canada Pension Plan Investment Board (CPPIB) for $2.75billion.
It retained about 30 per cent however.
The original founders Zennstrom and Friis re-invested in the company in 2009. According to the New York Times they held a 14 per cent stake which they place in holding company Joltid.
Their share of the sale was estimated at $1.1billion by the newspaper.
Microsoft already has Windows Live Messenger, which offers free, instant messaging, plus voice and video chat.
It is not currently available on Windows Phone 7 software however.
Messenger currently has around 330million active users each month, with around 40million online at any one time.
In contrast Skype is a lot smaller. Although 663million people are registered on Skype it has 124million active users each month and typically 20 to 30million users online at any one time. 
Most of its services are free as calls are made between computers or in some cases internet-enabled phones.
* 1975 Microsoft founded 
* $217.82billion market cap worth 
* $68.62billion turn over last year 
* $50.09billion pre-tax profit last year 
* -10.75 per cent share price drop over last year 
* 350million Windows 7 licenses sold to date
* 2003 Skype founded
* 663 million registered users 
* $860m revenues last year and an operating profit of $264million
* $7million lost last year overall 
* $686million long-term debt 
* 207billion minutes of voice and video conversations in 2010
But there are also around 8million Skype users who pay for the service – a key difference between the two services. 
Skype is a great brand and has arguably better functionality than Messenger, but its profits are on shaky ground. It recorded an overall loss of $7million last year.
Last week rumours were circulating that Google and Facebook were sniffing round in a potential deal with Skype which could have influenced Microsoft’s decision. But according to a TechCrunch source Google came in second allegedly bidding just $4billion for Skype – less than half of what Microsoft forked out for it.
 But to put it in perspective the $8.5billion paid out is just 17% of the cash Microsoft had on their balance sheet at the end of the last quarter.         
There has been mixed reaction from Silicon Valley about the shock move.
Leif-Olof Wallin, research vice president at IT research and advisory firm, Gartner, said: ‘We think this is a positive thing for Microsoft. Skype is a very powerful brand with a huge install base.
While Michael Clendenin, managing director of research and advisory firm, RedTech Advisors, said: ‘In this atmosphere of Internet Bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap…
‘But if you consider (Skype) was just valued at about $2.5billion 18 months ago when a chunk was sold off, then $8.5billion seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company’s online and mobile strategy.’
At yesterday’s close Microsoft’ share price was $25.83 per share. At opening this morning it had fallen 1.87 per cent to $25.37 per share. 
It makes money on voicemail services and calls to landlines or mobile numbers.
Microsoft’s most high profile Internet purchase was the $240million it paid for a 1.6 per cent share in Facebook in 2007.
Bill Gates’s company has also invested in the MSN Internet portal and Bing search engine, racking up $7billion in losses in the last four years. 
Apple’s FaceTime video-calling service – available on its latest iPhone and Mac computers – has been a big hit with consumers.
 Google recently followed suit by adding video to its popular Google Talk application for smartphones.
The deal is relatively small for Microsoft, which has $50billion in cash and short-term investments on its balance sheet.
‘I think the price is quite reasonable,’ said Sean Lee, a Taipei-based manager of the Global Top Dividend Fund at Shinkong Investment Trust, which owns Microsoft shares.
Skype had recently been looking at other options including tie-ups with Facebook and Google.  
Microsoft and Skype declined comment.  – Daily Mail UK