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May 10, 2011, 6:45 PM EDT
By Dina Bass, Douglas MacMillan and Joseph Galante
May 10 (Bloomberg) -- Skype Technologies SA’s owners refused to entertain offers of less than $7 billion, the value they expected the startup to get from a planned initial public offering, before agreeing to a buyout from Microsoft Corp., according to people with knowledge of the talks.
Microsoft Chief Executive Officer Steve Ballmer clinched the all-cash agreement yesterday, just more than a month after his initial overture to private equity firm Silver Lake, one of Skype’s biggest owners, said the people, who asked not to be identified because the talks were private.
“Microsoft really wanted this,” said Matt McCormick, a money manager for Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 billion, including Microsoft shares. “Microsoft right now is trying to do things to keep up with other faster- growing technology companies.”
Ballmer, 55, is making Microsoft’s largest acquisition on a wager he can use Internet calling to play catch-up in online and Web advertising. He offered more than $7 billion to cover Skype’s debt and keep a rival from gaining a business that would add calling features to games, e-mail and software on computers and mobile phones. While Google Inc. expressed interest, neither it nor other bidders made formal offers, the people said.
Microsoft, based in Redmond, Washington, is making the biggest Internet takeover in more than a decade to lure Web users and advertisers to help it catch Google in online advertising and Apple Inc. in mobile software.
‘Needed Kick-Start’
Ballmer plans to connect Skype, which boasts 170 million active users, to Microsoft’s Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. Skype offers voice and video calling over the Internet.
“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.”
Microsoft was already negotiating a partnership with Skype when Ballmer kicked off takeover discussions. He said in an interview that he opted to pursue an acquisition after consulting with the leaders of the Office and Windows divisions.
Ballmer said he then directed Chief Financial Officer Peter Klein to make an unsolicited takeover offer to Silver Lake. Talks began in late March, the people familiar said.
Ballmer led Microsoft’s efforts and kept the plans secret outside of a small team working on the deal, which included Microsoft Business Division Chief Financial Officer Amy Hood and Marc Brown, who oversees corporate development, one of the people said.
No-Shop Clause
Microsoft’s negotiators insisted on a no-shop clause, which barred Skype from seeking other bidders, according to one person familiar with the matter.
The parties agreed on a price in mid-April and signed the deal the night before it was announced. Microsoft paid a high premium in part because it expected the stock to rise after the share sale, meaning it would cost more to acquire Skype down the road, two of the people said.
“Microsoft was the only serious bidder at that number,’’ Marc Andreessen, co-founder of Skype investor Andreessen Horowitz, a venture capital firm, said in an interview.
Skype’s backers also talked with Google but didn’t reach the point of discussing a price and no formal offer was made, two people said. There were no other serious offers, one of them said.
The deal will add to Microsoft’s profit in the year after it closes, Ballmer said in an interview yesterday.
Microsoft Skype Unit
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 expects to receive regulatory clearance for the purchase this year.
Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. The founders 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 Andreessen Horowitz.
A purchase by Microsoft would divert unprofitable Skype from a plan, announced in August, to sell $100 million of shares in an IPO. 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 16 cents to $25.67 in Nasdaq Stock Market trading at 4 p.m. New York time. The stock has dropped 8 percent this year.
‘Intelligent Move’
The acquisition price includes debt, Microsoft said. 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.
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.
Online Revival Attempt
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 and has less than a fourth of Google’s U.S. Web-search market share.
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.
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’s iOS, said Colin Gillis, an analyst at BGC Partners LP.
“Apple’s got their FaceTime video chat. Android has video chat,” said Gillis, who is based in New York and rates Microsoft “buy.” “Now Microsoft is in the game.”
Skype as Verb
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 Android phones. Microsoft is planning to keep and promote the Skype brand.
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 and Covington & Burling LLP are providing legal advice to Microsoft on the transaction, and Sullivan & Cromwell LLP is advising Skype and Silver Lake.
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.
“We love the Skype brand -- it’s a verb, for gosh sakes,” Ballmer said in the interview.
--With assistance from Serena Saitto, Amy Thomson, Sarah Rabil and Rita Nazareth in New York and Brian Womack and Cris Valerio in San Francisco. Editors: Tom Giles, Nick Turner
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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May 10 (Bloomberg) -- Skype Technologies SA’s owners refused to entertain offers of less than $7 billion, the value they expected the startup to get from a planned initial public offering, before agreeing to a buyout from Microsoft Corp., according to people with knowledge of the talks.
Microsoft Chief Executive Officer Steve Ballmer clinched the all-cash agreement yesterday, just more than a month after his initial overture to private equity firm Silver Lake, one of Skype’s biggest owners, said the people, who asked not to be identified because the talks were private.
“Microsoft really wanted this,” said Matt McCormick, a money manager for Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 billion, including Microsoft shares. “Microsoft right now is trying to do things to keep up with other faster- growing technology companies.”
Ballmer, 55, is making Microsoft’s largest acquisition on a wager he can use Internet calling to play catch-up in online and Web advertising. He offered more than $7 billion to cover Skype’s debt and keep a rival from gaining a business that would add calling features to games, e-mail and software on computers and mobile phones. While Google Inc. expressed interest, neither it nor other bidders made formal offers, the people said.
Microsoft, based in Redmond, Washington, is making the biggest Internet takeover in more than a decade to lure Web users and advertisers to help it catch Google in online advertising and Apple Inc. in mobile software.
‘Needed Kick-Start’
Ballmer plans to connect Skype, which boasts 170 million active users, to Microsoft’s Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. Skype offers voice and video calling over the Internet.
“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.”
Microsoft was already negotiating a partnership with Skype when Ballmer kicked off takeover discussions. He said in an interview that he opted to pursue an acquisition after consulting with the leaders of the Office and Windows divisions.
Ballmer said he then directed Chief Financial Officer Peter Klein to make an unsolicited takeover offer to Silver Lake. Talks began in late March, the people familiar said.
Ballmer led Microsoft’s efforts and kept the plans secret outside of a small team working on the deal, which included Microsoft Business Division Chief Financial Officer Amy Hood and Marc Brown, who oversees corporate development, one of the people said.
No-Shop Clause
Microsoft’s negotiators insisted on a no-shop clause, which barred Skype from seeking other bidders, according to one person familiar with the matter.
The parties agreed on a price in mid-April and signed the deal the night before it was announced. Microsoft paid a high premium in part because it expected the stock to rise after the share sale, meaning it would cost more to acquire Skype down the road, two of the people said.
“Microsoft was the only serious bidder at that number,’’ Marc Andreessen, co-founder of Skype investor Andreessen Horowitz, a venture capital firm, said in an interview.
Skype’s backers also talked with Google but didn’t reach the point of discussing a price and no formal offer was made, two people said. There were no other serious offers, one of them said.
The deal will add to Microsoft’s profit in the year after it closes, Ballmer said in an interview yesterday.
Microsoft Skype Unit
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 expects to receive regulatory clearance for the purchase this year.
Skype was founded in 2003 by Niklas Zennstrom and Janus Friis. The founders 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 Andreessen Horowitz.
A purchase by Microsoft would divert unprofitable Skype from a plan, announced in August, to sell $100 million of shares in an IPO. 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 16 cents to $25.67 in Nasdaq Stock Market trading at 4 p.m. New York time. The stock has dropped 8 percent this year.
‘Intelligent Move’
The acquisition price includes debt, Microsoft said. 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.
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.
Online Revival Attempt
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 and has less than a fourth of Google’s U.S. Web-search market share.
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.
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’s iOS, said Colin Gillis, an analyst at BGC Partners LP.
“Apple’s got their FaceTime video chat. Android has video chat,” said Gillis, who is based in New York and rates Microsoft “buy.” “Now Microsoft is in the game.”
Skype as Verb
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 Android phones. Microsoft is planning to keep and promote the Skype brand.
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 and Covington & Burling LLP are providing legal advice to Microsoft on the transaction, and Sullivan & Cromwell LLP is advising Skype and Silver Lake.
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.
“We love the Skype brand -- it’s a verb, for gosh sakes,” Ballmer said in the interview.
--With assistance from Serena Saitto, Amy Thomson, Sarah Rabil and Rita Nazareth in New York and Brian Womack and Cris Valerio in San Francisco. Editors: Tom Giles, Nick Turner
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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