Microsoft Bought Skype For $8.5 Billion, Is It Worth More or Less ?

Microsoft has finally bought Skype for $8.5 billion, in an all-cash deal. The Wall Street Journal confirmed  the news after the rumours which spread few days back. The announcement is likely to come out later, according to several reports. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates might host a press conference to announce this big deal.

It is said that, Skype Technologies SA’s owners refused to entertain offers of less than $7 billion, the value they expected the start up to get from a planned initial public offering, before agreeing to a buyout from Microsoft Corp. (MSFT), according to people with knowledge of the talks. Skype has been up for sale for some time and many investors were interested in the deal. Some sources indicated both eBay and Silver Lake Partners have been getting nervous about the delayed initial public offering and have been pushing for a sale of Skype. Facebook and Google were said to be earlier dance partners for Skype, and Microsoft was a late entrant and is now close to walking away with the prize.

It shouldn’t surprise anyone, if Microsoft comes in for major heat on this decision to buy Skype and the software company could always botch this purchase, as it often does when it buys a company. On the other hand, the Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

Although rumours were there but it is hard to believe that Facebook and Google were serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In essence, I feel Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

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Niklas Zennström and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion. Damn, these guys know how to double-dip! Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion. Whereas, Andreessen Horowitz had three percent of the deal and made $205 million profit on their $50 million initial investment.

The biggest winner of this deal could actually be Facebook. The Palo Alto, Calif.-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google. Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

The main reason behind this big decision was, as Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skype’s revenues had stalled. The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise.

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