1. ANALYSIS OF MICROSOFT'S STRATEGIC
ACQUISITION SKYPE
Michael Osypenko
Veranika Zdanovich
Ruslan Samchuk
Denis Solyan

2. MAIN GOALS OF PROJECT
• Analyze Microsoft’s latest acquisition of Skype
• Understanding Skype’s and Microsoft’s business
models and their product portfolio respectively
• Microsoft’s reasoning behind the acquisition
• How Microsoft got best benefits from the acquisition
• To analyze data support of acquisition
• Make your own critical conslusions

3. KEY FACTS AND FIGURES
10th May 2011: Microsoft acquirers Skype at a price of $8.5 billion (cash)
Financial multiples (Skype 2010):
companies
Very high relative to other
Enterprise value/EBITDA: > 32x
within the IT sector!
Skype is growing rapidly (from 2009 to 2010):
•
User base: 40%
•
Calling minutes: 150% (18 months)
•
Revenue: 20%
•
EBITDA (adj.): 40%

4. AIMS OF THIS ACQUISITION FOR MICROSOFT
Strategic reason
•
In line with Microsoft’s growth strategy
•
Prevent competitors such as Google and Apple from buying
Product reason
•
Skype is the perfect complement to Microsoft’s existing products
•
Live video chat on Windows computers and Xbox 360
•
Communication when working with Microsoft Office
•
Call-back and instant messaging features in Outlook
•
Increase competitiveness on the Windows Phone 7 mobile platform
Network reason
•
Leverage the network effects
•
Direct line communication with Skype’s large customer base (ca.700 million)
•
Connect Skype users with Lync, Outlook, Xbox Live and other communities

5. MICROSOFT CAN LEVERAGE SKYPE IN SEVERAL
WAYS
Pros:
•
Acquisitions is in line with the company’s growth strategy
•
Prevent competitors from acquiring Skype
•
Skype’s technology is complementary to MS products and can be integrated in all of
the company’s business segments
•
The company got access to Skype’s large customer base
Cons:
•
Concerns about the high acquisition price
•
Problems to integrate (retaining employees, organizational etc.)

6. MICROSOFT
World’s largest software company
based on software revenue.
Microsoft’s mission is to create
technology that transforms
the way people work,
play and communicate.

7. MICROSOFT’S PRODUCT PORTFOLIO

8. REVENUE AND PROFIT OF MICROSOFT

9. MICROSOFT’S OBJECTIVE AND STRATEGY
•
Time is a critical factor in this business
it takes much longer time to develop a well
functioning product themselves than to acquire.
•
By buying Microsoft gets Skype’s existing customer base
•
Large pile of cash is being put to work
“Strategic partnerships and acquisitions
have always played an important role
in Microsoft's strategy for growth
and technology leadership.”
Steven A. Ballmer (Microsoft CEO)
leverage the network effect

10. SKYPE BUSINESS MODEL
•
Freemium
•
Free-of-charge services
•
Premium services

11. SKYPE

12. SKYPE REVENUE

13. THE DEAL
- Total consideration would be $8.5 billion in cash
- Skype will become a new division of Microsoft
- Microsoft’s largest acquisition till date, surpassing the $6 billion paid for aQuantive
The division of the consideration between Skype’s shareholders
 Silver lake and other investors - $4.76 billion for 56% stake which they purchased from
eBay for 1.9 billion in 2009
 eBay – 2.55 billion for 30% stake (they had acquired Skype in 2005 for 2.6 billion and
sold it for 1.9+2.55=4.45 billion)
 Skype’s founders – 1.19 billion for 14% stake

14. REACTION TO ACQUISITION ENOUNCEMENT

15. KEY RISK FOR MICROSOFT
The rate of financial performance may decline
KEY QUESTION OF MICROSOFT
How have the acquisition affected on the share
performance?

16. FINANCIAL OVERVIEW OF SKYPE AND MICROSOFT

17. REASONS BEHIND NEGATIVE REACTION
•
Skype did not seem to improve Microsofts and profitability
•
The valuation of Skype was very high (10x revenues and 34x
EBITDA v/s the industry average of 7x-8x EBITDA)
Given that there was no actual bidding war and that Microsoft’s bid
was launched to pre-empt Skype’s investors from an IPO, offering
USD 8.5 billion was to high
•
•
Microsoft had large cash balances it would have been a good time
for the deal
•
Skype itself had insisted USD 7 billion as the starting point of
negotiations
•
Success of this acquisition depends on whether Microsoft can
convert the thrifty users into future Microsoft revenues
•
Skype revenue is low
•
Only 8.8 million Skype users out of 663 million users were paing
customers (meagre 1.3 of total users)

18. TRANSACTION COMPARABLES
Paid User Base of Skype (in ‘000s) =
8,800
Estimated equity value = $2,173 billion
Premium paid by Microsoft = 291,2%

19. SKYPE FINANCIALS BEFORE QUIZITION, THOUSANDS OF U.S. DOLLARS
700
600
Net revenue
500
Gross profit
400
Total operating expenses
300
Net income (loss)
200
100
0
December
31, 2007
December
31, 2008
November
18, 2009
June 30, 2009
June 30, 2010

20. DISCOUNTED CASH FLOW

21. MICROSOFT FINANSIALS BEFORE AND AFTER AQUIZITION MILLIONS OF U.S.
DOLLARS
90
80
70
Net revenue
60
Gross profit
50
SG&A Expense
40
Net income loss
30
20
10
0
June 30, 2009
June 30, 2010
June 30, 2011
June 30, 2012
June 30, 2013

22. Microsoft's shares oustanding, figures in billions
9.1
9
8.9
8.8
8.7
8.6
8.5
8.4
8.3
8.2
8.1
8
Basic Shares
Outstanding
Diluted Shares
Outstanding
June 30, 2009
June 30, 2010
June 30, 2011
June 30, 2012
June 30, 2013
Microsoft's EPS
3
2
EPS (basic)
1
EPS (diluted)
0
June 30, 2009 June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013

23. POST ACQUISITION RESULTS
Skype has been integrated with Microsoft link and integration efforts are
continuing
Skype has reported high revenue growth (CAGR) of 55% in the past two
years

24. BENEFITS AND SYNERGIES OF THE ACQUISITION
1. Strategic reason
• a.
In line with Microsoft’s growth strategy
• b.
Prevent competitors such as Google and Apple from buying
2. Product reason
• a.
Skype is the perfect complement to Microsoft’s existing products
• b.
Live video chat on Windows computers and Xbox 360
• c.
Communication when working with Microsoft Office
• d.
Call-back and instant messaging features in Outlook
• e.
Increase competitiveness on the Windows Phone 7 mobile
platform

25. 3.
Benefits and synergies of the
acquisition
Network reason
• a. Leverage the network effects
• b. Direct line communication with Skype’s large customer
base (ca.700 million)
• Connect Skype users with Lync, Outlook, Xbox Live and other
communities
DEFENSIVE RATIONALE
If Microsoft did not buy Skype, it may have ended up in
the hands of a competitor such as Google, who might be able to
use it to strengthen its ecosystem at the expense of Microsoft.
OFFENSIVE STRATEGY
Google’s acquisition strategy is usually to acquire earlierstage companies than Microsoft’s deal to acquire Skype. Google
purchased YouTube for $1.6 billion in 2006.

26. POSSIBLE ISSUES WITH THE ACQUISITION
1.
•
•
•
2.
•
•
High price
Skype is growing quickly
Value is exponential correlated with number of user
Price/user: Skype 12 $ aFacebook 62 $
Hard to integrate
Ebay had a hard time integrating
Skype complementary to Microsoft’s business strategy.
Acquisitions are a quick way to move into the space
that these tech giants see evolving, such as Microsoft seeking
to broaden its communication base, Google expanding
beyond search to experiment with new models of
advertising, and Facebook’s attempts to learn from the human
capital that they are able to acquire

27. CONCLUSION
Microsoft bought a complementary company, hence
Skype mirrors many of Microsoft’s existing products and in our
opinion can Microsoft leverage Skype in several ways.
•
Pros
1.
Acquisitions is in line with the company’s growth strategy
2.
Prevent competitors from acquiring Skype
3.
Skype’s technology is complementary to MS products
and can be
4.
integrated in all of the company’s business segments
5.
The company got access to Skype’s large customer base
•
Cons
1.
Concerns about the high acquisition price
2.
Problems to integrate (retaining
employees, organizational etc.)

28. THANK YOU
FOR
YOUR ATTENTION!