Microsoft lands Skype for $8.6 billion all cash deal

skype

Microsoft Corp plans to buy Internet phone service Skype for $8.5 billion in its biggest-ever acquisition, placing a rich bet on mobile and the Internet to try to best rivals such as Google Inc.

In a deal that took about a month from offer to signing, the software company outbid Google and Facebook, which sources said offered to partner or buy Skype for $3 billion to $4 billion. They planned to use the provider of Internet telephone services to keep users glued to their online communities.

Microsoft's interest in the money-losing, but popular service highlights a need to gain new customers for its Windows and Office software. Skype has 145 million users on average each month and has gained favor among small business users.

But investors expressed skepticism over the deal and sent Microsoft shares lower.

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

"We are a super-ambitious company," Ballmer told reporters Tuesday.

The deal would be a big payday for Skype's owners, online auction site eBay Inc and investors including Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz.

A source familiar with the deal told Reuters that Skype's owners made more than three times their investment — a total capital gain of more than $5 billion. It is one of the largest capital gains made on a private equity investment, the source said.

That gain was made in around 18 months, a short turnaround for private equity which typically invests with a time horizon of three to five years.

Microsoft is putting more energy and resources into mobile and the Internet as the personal computer business underpinning its Windows and Office franchise appears to be under threat.

Skype delayed plans for an initial public offering that was expected to value the company at more than $3 billion. It looked at other options, including tie-ups with Facebook and Google. Such a deal was expected to value Skype at $3 billion to $4 billion.

The Luxembourg-based company, which allows people to make calls at no charge, but has also developed premium services, would give Microsoft a foothold in the video-conferencing market as businesses shift to cheaper 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.

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 is set to become a new business division within Microsoft with Skype CEO Tony Bates in charge and reporting directly to Ballmer, Microsoft said.

The Skype deal is the biggest in the 36-year history of the world's largest software company.

Although the $8.5 billion deal sum would not stretch cash-rich Microsoft, some said it was high for a company whose ownership has changed several times during its relatively short life.

"In this atmosphere of Internet Bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap," said Shanghai-based Michael Clendenin, managing director of consulting firm RedTech Advisors.

"But if you consider (it) was just valued at about $2.5 billion 18 months ago when a chunk was sold off, then $8.5 billion 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," he said.

"I can't wait to hear the logic behind this," said Fort Pitt Capital's Kim Caughey Forrest.

Skype, which was formed in 2003, was bought by eBay Inc in 2005 for $3.1 billion. Last year it had $860 million in revenue, and a net loss of $7 million, according to data in its initial public offering filing.

In 2009, eBay sold a majority stake in Skype to the investor group for $1.9 billion in cash and a $125 million note. EBay retained about a third.

Ballmer said his company did not use Wall Street advisers on the deal, approaching the investor group that owns Skype directly. Skype was advised by Goldman Sachs and JPMorgan.

The move saved Microsoft about $25 million to $30 million. The world's largest software company figured buying a private company could be done in-house, particularly one with a lead investor representing the full ownership.

"We thought it made sense to go directly to Silver Lake which is what we did, and that seems to have worked out well," Ballmer told Reuters.

Ballmer said Chief Financial Officer Peter Klein led Microsoft's dealmaking process for the takeover.

Reuters contributed to this report.

Norm Bond
NORM BOND shows people how to use digital marketing tools to find customers, grow sales and increase profits. And if you're not using digital tools he shows you how to do that too. He currently splits his time between Bangkok, Thailand and the U.S. He is available for consulting and speaking.
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