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May 10, 2011, 12:31 PM EDT
By Dina Bass, Joseph Galante and Douglas MacMillan
(Updates with CEO comments starting in second paragraph.)
May 10 (Bloomberg) -- Microsoft Corp. agreed to buy Skype Technologies SA for $8.5 billion, using a growing cash pile to gain the world’s most popular Web-calling service and help it catch up in online and mobile advertising.
Microsoft will acquire Luxembourg-based Skype, with 170 million active users, from investors led by private equity firm Silver Lake, the companies said in a statement today. The deal will add to Microsoft’s profit in the year after it closes, Chief Executive Officer Steve Ballmer said in an interview.
The takeover may help Ballmer lure Skype users to Microsoft’s phones and software and narrow Google Inc.’s lead in Internet advertising. Redmond, Washington-based Microsoft will connect Skype to its Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. The acquisition, Microsoft’s largest, is also the biggest Internet takeover in more than a decade.
“This could give Microsoft a much-needed kick-start” in telecommunications, said Paolo Pescatore, an analyst at CCS Insight in London. In voice services, “Skype has certainly set the benchmark and gained a lot of traction.”
Skype will become a Microsoft business unit, the companies said. Skype CEO Tony Bates will be president of the Microsoft Skype Division, reporting to Ballmer. The agreement was approved by the boards of both companies. Microsoft hopes to get regulatory clearance for the purchase this year, Ballmer said.
EBay Investment
Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. Zennstrom and Friis sold the company for $2.6 billion in 2005 to San Jose, California-based EBay Inc., which in turn sold off most of its stake four years later. Current investors include EBay, Silver Lake and venture-capital firm Andreessen Horowitz.
A purchase by Microsoft would divert unprofitable Skype from a plan, announced in August, to sell $100 million of shares in an initial public offering. The company has struggled to convert users of its free PC-to-PC phone services into paying customers, according to a March regulatory filing. The company has 663 million total users, most of whom aren’t active callers.
Microsoft, the world’s largest software maker, fell 34 cents to $25.49 in Nasdaq Stock Market trading at 12:02 p.m. New York time. Before today, the stock had dropped 7.5 percent this year.
‘Intelligent Move’
The price includes debt, Microsoft said. Skype reported about $775 million in debt, along with a revolving credit line of $30 million, in a filing in April. Microsoft had cash and short-term investments of about $50 billion at the end of March.
“It looks like an intelligent move,” said Mike Holland, chairman of Holland & Co. in New York, where he oversees assets of more than $4 billion, including Microsoft shares. “They have the mother lode of cash sitting there. They’ve been smart in not going crazy” with the price, he said.
Microsoft’s deal to purchase of Skype surpasses its acquisition of AQuantive Inc. for about $6 billion in 2007. It’s also the biggest takeover of an Internet company since the dot- com bubble 11 years ago, data compiled by Bloomberg show. The deal is the largest since Spain’s Terra Networks SA announced it was buying Internet search service Lycos Inc. for $13.8 billion including net debt in May 2000, the data show. The value of the all-stock deal fell to $4.8 billion by the time it closed in October 2000.
Internet Losses
Ballmer is aiming to revive Microsoft’s online services division, which had an operating loss of more than $700 million in the three months that ended in March. The company lags behind Google in Web search and related advertising.
“Microsoft has a lot of areas in its overall Internet business that it could be working on, and whether the acquisition of Skype is the key silver bullet that fixes all of that remains to be seen,” said Kunal Bajaj, head of telecommunications consulting firm Analysys Mason India Pvt. in New Delhi. “People go to Skype to make phone calls, and there isn’t much else in social networking, instant-messaging and status updates and things like that.”
The software maker’s backing may boost Skype’s ability to replace home telephone service and cut into mobile-phone revenue. The combination may also bolster Microsoft’s attempts to get corporate customers to replace traditional phone and video-conferencing systems with its software.
Microsoft offers corporate telephony services through its Lync product, as well as consumer video-chat products as part of its instant-messaging software and Xbox online service. The company said last year that Lync has the potential to generate more than $1 billion a year in sales. Revenue from the product rose 30 percent last quarter, the company said last month, without disclosing specific numbers.
‘In the Game’
Tightly integrated Skype services could be an added selling point for Windows Phone, the mobile operating system Microsoft is promoting as a competitor to Google’s Android and Apple Inc.’s iOS, said Colin Gillis, an analyst at BGC Partners LP. Skype’s services include voice and video calling.
“Apple’s got their Face Time video chat. Android has video chat,” said Gillis, who is based in New York and rates Microsoft “buy.” “Now Microsoft is in the game.”
Microsoft said it will continue to develop and support Skype for rival products. Skype currently makes applications for products like Apple’s iPhone and iPad and mobile phones running Google’s Android operating system. Microsoft is planning to keep and promote the Skype brand.
“We love the Skype brand -- it’s a verb, for gosh sakes,” Ballmer said in the interview.
Standalone Business
The deal is reminiscent of EMC’s $635 million acquisition of VMware Inc. in 2004, said Marc Andreessen, co-founder of Skype investor Andreessen Horowitz. VMware now has a market capitalization of $38.9 billion.
“The most successful acquisition in high tech of the last decade was VMware, and the reason it was so successful was EMC left it alone,” said Andreessen. “VMware gets all the advantages of being a part of EMC but gets to operate as a standalone business. Microsoft is emulating that structure.”
Microsoft abandoned an unsolicited effort to buy Yahoo! Inc. for as much as $47.5 billion in 2008 and instead struck an agreement to provide search services on Yahoo’s pages. The two companies said last month that so far the partnership is bringing in less revenue than expected. Microsoft has less than a fourth of Google’s U.S. Web-search market share.
Free Chats
Skype, which started as a way for consumers to chat for free online, is developing premium services such as group video calling and is pursuing corporate accounts. Skype’s competitors include the fledgling Google Voice service and video-chat client Fring.
“Google is probably the one that’s getting the closest to Skype” with its voice product, though the Google Talk service is “not on par in terms of quality,” said Leif-Olof Wallin, a telecommunications analyst at Gartner Inc. in Stockholm. The Google Voice product is a late entrant and will find it difficult to catch up, Wallin said. Vonage Holdings Corp. is another rival in the paid-for business in the U.S., he said.
Microsoft will need to figure out how to make money from Skype. In a December regulatory filing, Skype disclosed that little more than 1 percent of users paid for the service.
“The biggest monetization potential is through ads, but you’d need to understand how often people are using Skype, like measuring calls, but that is difficult,” Wallin said.
Skype has more than $800 million in annual revenue, Ballmer said today. His forecast that Skype will add to earnings in the first year referred to profit excluding certain costs.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. advised Skype on the deal. Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice to Skype’s founders. Microsoft declined to disclose its bankers.
Simpson Thacher & Bartlett LLP is providing legal advice to Microsoft on the transaction, and Sullivan & Cromwell LLP is advising Skype and Silver Lake.
--With assistance from Amy Thomson and Sarah Rabil in New York, Mark Lee in Hong Kong, Edmond Lococo in Beijing, Brian Womack in San Francisco, Matthew Campbell in Paris and Cornelius Rahn in Frankfurt. Editors: Tom Giles, Kenneth Wong, Ville Heiskanen
To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net.; Douglas Macmillan in San Francisco at dmacmillan3@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
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(Updates with CEO comments starting in second paragraph.)
May 10 (Bloomberg) -- Microsoft Corp. agreed to buy Skype Technologies SA for $8.5 billion, using a growing cash pile to gain the world’s most popular Web-calling service and help it catch up in online and mobile advertising.
Microsoft will acquire Luxembourg-based Skype, with 170 million active users, from investors led by private equity firm Silver Lake, the companies said in a statement today. The deal will add to Microsoft’s profit in the year after it closes, Chief Executive Officer Steve Ballmer said in an interview.
The takeover may help Ballmer lure Skype users to Microsoft’s phones and software and narrow Google Inc.’s lead in Internet advertising. Redmond, Washington-based Microsoft will connect Skype to its Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. The acquisition, Microsoft’s largest, is also the biggest Internet takeover in more than a decade.
“This could give Microsoft a much-needed kick-start” in telecommunications, said Paolo Pescatore, an analyst at CCS Insight in London. In voice services, “Skype has certainly set the benchmark and gained a lot of traction.”
Skype will become a Microsoft business unit, the companies said. Skype CEO Tony Bates will be president of the Microsoft Skype Division, reporting to Ballmer. The agreement was approved by the boards of both companies. Microsoft hopes to get regulatory clearance for the purchase this year, Ballmer said.
EBay Investment
Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. Zennstrom and Friis sold the company for $2.6 billion in 2005 to San Jose, California-based EBay Inc., which in turn sold off most of its stake four years later. Current investors include EBay, Silver Lake and venture-capital firm Andreessen Horowitz.
A purchase by Microsoft would divert unprofitable Skype from a plan, announced in August, to sell $100 million of shares in an initial public offering. The company has struggled to convert users of its free PC-to-PC phone services into paying customers, according to a March regulatory filing. The company has 663 million total users, most of whom aren’t active callers.
Microsoft, the world’s largest software maker, fell 34 cents to $25.49 in Nasdaq Stock Market trading at 12:02 p.m. New York time. Before today, the stock had dropped 7.5 percent this year.
‘Intelligent Move’
The price includes debt, Microsoft said. Skype reported about $775 million in debt, along with a revolving credit line of $30 million, in a filing in April. Microsoft had cash and short-term investments of about $50 billion at the end of March.
“It looks like an intelligent move,” said Mike Holland, chairman of Holland & Co. in New York, where he oversees assets of more than $4 billion, including Microsoft shares. “They have the mother lode of cash sitting there. They’ve been smart in not going crazy” with the price, he said.
Microsoft’s deal to purchase of Skype surpasses its acquisition of AQuantive Inc. for about $6 billion in 2007. It’s also the biggest takeover of an Internet company since the dot- com bubble 11 years ago, data compiled by Bloomberg show. The deal is the largest since Spain’s Terra Networks SA announced it was buying Internet search service Lycos Inc. for $13.8 billion including net debt in May 2000, the data show. The value of the all-stock deal fell to $4.8 billion by the time it closed in October 2000.
Internet Losses
Ballmer is aiming to revive Microsoft’s online services division, which had an operating loss of more than $700 million in the three months that ended in March. The company lags behind Google in Web search and related advertising.
“Microsoft has a lot of areas in its overall Internet business that it could be working on, and whether the acquisition of Skype is the key silver bullet that fixes all of that remains to be seen,” said Kunal Bajaj, head of telecommunications consulting firm Analysys Mason India Pvt. in New Delhi. “People go to Skype to make phone calls, and there isn’t much else in social networking, instant-messaging and status updates and things like that.”
The software maker’s backing may boost Skype’s ability to replace home telephone service and cut into mobile-phone revenue. The combination may also bolster Microsoft’s attempts to get corporate customers to replace traditional phone and video-conferencing systems with its software.
Microsoft offers corporate telephony services through its Lync product, as well as consumer video-chat products as part of its instant-messaging software and Xbox online service. The company said last year that Lync has the potential to generate more than $1 billion a year in sales. Revenue from the product rose 30 percent last quarter, the company said last month, without disclosing specific numbers.
‘In the Game’
Tightly integrated Skype services could be an added selling point for Windows Phone, the mobile operating system Microsoft is promoting as a competitor to Google’s Android and Apple Inc.’s iOS, said Colin Gillis, an analyst at BGC Partners LP. Skype’s services include voice and video calling.
“Apple’s got their Face Time video chat. Android has video chat,” said Gillis, who is based in New York and rates Microsoft “buy.” “Now Microsoft is in the game.”
Microsoft said it will continue to develop and support Skype for rival products. Skype currently makes applications for products like Apple’s iPhone and iPad and mobile phones running Google’s Android operating system. Microsoft is planning to keep and promote the Skype brand.
“We love the Skype brand -- it’s a verb, for gosh sakes,” Ballmer said in the interview.
Standalone Business
The deal is reminiscent of EMC’s $635 million acquisition of VMware Inc. in 2004, said Marc Andreessen, co-founder of Skype investor Andreessen Horowitz. VMware now has a market capitalization of $38.9 billion.
“The most successful acquisition in high tech of the last decade was VMware, and the reason it was so successful was EMC left it alone,” said Andreessen. “VMware gets all the advantages of being a part of EMC but gets to operate as a standalone business. Microsoft is emulating that structure.”
Microsoft abandoned an unsolicited effort to buy Yahoo! Inc. for as much as $47.5 billion in 2008 and instead struck an agreement to provide search services on Yahoo’s pages. The two companies said last month that so far the partnership is bringing in less revenue than expected. Microsoft has less than a fourth of Google’s U.S. Web-search market share.
Free Chats
Skype, which started as a way for consumers to chat for free online, is developing premium services such as group video calling and is pursuing corporate accounts. Skype’s competitors include the fledgling Google Voice service and video-chat client Fring.
“Google is probably the one that’s getting the closest to Skype” with its voice product, though the Google Talk service is “not on par in terms of quality,” said Leif-Olof Wallin, a telecommunications analyst at Gartner Inc. in Stockholm. The Google Voice product is a late entrant and will find it difficult to catch up, Wallin said. Vonage Holdings Corp. is another rival in the paid-for business in the U.S., he said.
Microsoft will need to figure out how to make money from Skype. In a December regulatory filing, Skype disclosed that little more than 1 percent of users paid for the service.
“The biggest monetization potential is through ads, but you’d need to understand how often people are using Skype, like measuring calls, but that is difficult,” Wallin said.
Skype has more than $800 million in annual revenue, Ballmer said today. His forecast that Skype will add to earnings in the first year referred to profit excluding certain costs.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. advised Skype on the deal. Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice to Skype’s founders. Microsoft declined to disclose its bankers.
Simpson Thacher & Bartlett LLP is providing legal advice to Microsoft on the transaction, and Sullivan & Cromwell LLP is advising Skype and Silver Lake.
--With assistance from Amy Thomson and Sarah Rabil in New York, Mark Lee in Hong Kong, Edmond Lococo in Beijing, Brian Womack in San Francisco, Matthew Campbell in Paris and Cornelius Rahn in Frankfurt. Editors: Tom Giles, Kenneth Wong, Ville Heiskanen
To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net.; Douglas Macmillan in San Francisco at dmacmillan3@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net
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