Microsoft may have overpaid for Skype with its $8.5 billion all-cash offer, but it was bidding against a sure IPO. While $8.5 billion may look expensive now, it is a pre-emptive strike to take Skyoe off the table before an IPO. Microsoft’s bid had to be high enough to convince the company and its investors they were better off taking the Microsoft offer now. From what I can gather, there were nibbles by other suitors such as Google, but no other serious offers. Microsoft was bidding against the IPO.
The investors, which include Silver Lake Partners and Andreessen Horowitz, and Joltid, look like geniuses now. It was only 18 months ago that eBay sold Skype to the investor syndicate in a deal valuing Skype at $2.75 billion. Now Microsoft is buying the company for three times that much—an increase in value of $5.75 billion! And to think that the spin-off was almost scuttled by intellectual property litigation brought on by Skype’s original founders (who also ended up in the syndicate through Joltid).
Andreessen Horowitz, in particular, comes out smiling from this deal. Skype was one of its first investments. It was a big, risky play at the time, and now it’s paid off in spades. “It is so far our best and only exit,” quips Marc Andreessen, who spoke with me by phone this morning after the deal was formally announced. Andreessen wouldn’t get into the mechanics of the negotiations with Microsoft, but did say that the plan was to IPO and everything was in place for that to happen—from a new CEO to a significant growth in usage. “Microsoft is buying something with a real head of steam,” he says.
For instance, over the past 18 months, Skype has seen a 150 percent increase in monthly calling minutes. It’s mobile products are extremely popular, and video quality has improved dramatically. “We are in the middle of a transition in telecommunications from voice and video being a fixed hardware application to a software application sitting on top of the network,” says Andreessen. “Communications is a very big market, and a very strategic market for Microsoft.”
Microsoft certainly has a lot of products spanning from the enterprise to the consumer where it can attach Skype: Windows Phone, Xbox, Exchange, SharePoint. But it almost has too many products—it will be an integration challenge. Microsoft is good at those types of challenges. The real challenge will be to make sure that Skype doesn’t lose its identity as a standalone product.
$$$kype logo by Dirk Houbrechts