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Microsoft to Acquire Skype for $8.5 Billion, Seeking to Regain Ground on Growing Rivals

Strategic Insights

— 2 min read

Microsoft's interest in acquiring Skype, a popular internet phone service, highlights the company's need to gain new customers for its Windows and Office software. The acquisition aims to give Microsoft a foothold in the video-conferencing market, potentially lucrative, as businesses shift to lower-cost ways of communicating. Skype's 145 million users on average each month, particularly among small business users, make it an attractive asset. The deal was initially seen as valuing Skype at $3 billion to $4 billion, but the final price tag of $8.5 billion has raised concerns about Microsoft's ability to prove Skype's necessity to investors.

Key Takeaways:

  • Microsoft's acquisition of Skype values the company at $8.5 billion, a significant price tag for a service that was initially seen as worth $3 billion to $4 billion.
  • Skype has 145 million users on average each month, making it a popular internet phone service with a strong user base.
  • The acquisition aims to give Microsoft a foothold in the video-conferencing market, a potentially lucrative segment as businesses shift to lower-cost ways of communicating.
  • Skype's premium services, including voice and video communications, could be combined with Microsoft software such as Outlook to appeal to corporate users.
  • The voice and video communications could also link to Microsoft's Xbox live gaming, providing a new route for customers to interact.
  • Skype will become a new business division within Microsoft, with Skype Chief Executive Tony Bates in charge and reporting directly to Microsoft CEO Steve Ballmer.
  • The acquisition is the biggest in the 36-year history of the world's largest software company, Microsoft.

Statistics:

  • $8.5 billion: The price tag of Microsoft's acquisition of Skype.
  • 145 million: The average number of Skype users each month.
  • 10 to 1: The estimated ratio of Skype's acquisition price to its revenue.
  • $860 million: Skype's revenue in 2011.
  • $7 million: Skype's net loss in 2011, according to its initial public offering filing.
  • 3 to 4 billion: The initial estimated value of Skype before the acquisition.

Sources:

  • Microsoft Corp plans to buy Internet phone service Skype for $8.5 billion, a rich price as it seeks to regain ground on growing rivals such as Google Inc. (Source: Bloomberg).
  • Skype has 145 million users on average each month and has gained favor among small business users. (Source: Bloomberg).
  • Skype delayed plans for an initial public offering expected to raise $1bn. (Source: Bloomberg).
  • It has been looking at other options, including tie-ups with Facebook and Google. (Source: Bloomberg).
  • Shanghai-based Michael Clendenin, managing director of consulting firm RedTech Advisors, said: "In this atmosphere of Internet Bubble 2.0, picking up an unprofitable online company for roughly 10 times sales probably seems downright cheap." (Source: Shanghai-based Michael Clendenin, managing director of consulting firm RedTech Advisors).
  • Skype, which was formed in 2003, was bought by eBay Inc in 2005 for $3.1bn. (Source: Bloomberg).
  • EBay sold a majority stake in Skype to an investor group including Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz for $1.9bn in cash and a $125m note. (Source: Bloomberg).

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