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If you're a Microsoft shareholder, you shouldn't be wondering whether CEO Steve Ballmer overpaid for Skype. That's a waste of time. Of course, he overpaid.
Here’s a much better question: why is this man still CEO? That's just how bad this deal is.
It’s one thing for a CEO to convince himself that a deal is “strategic” – even if he's buying a money-loser with no proprietary technology and no viable business model.
But it's another for him to bid against himself and end up forking over $8.5 billion in cold cash to buy said money-loser – three times what it fetched a year and a half ago.
That's unforgivable.
Why the Microsoft board is happily going along with this folly is a mystery to me. Then again, this is the same board that blessed Ballmer's profligate $48 billion bid for Yahoo. Such is the fate of a company with too much money, too few good ideas and a share price that can't break $30.
It may seem harsh to condemn Ballmer for a smallish deal (Microsoft's market cap is over $215 billion) that is still months from closing. But it's impossible to ignore both the circumstance of the Skype deal and what it symbolizes.
According to various press accounts, there was no actual bidding war over Skype. Rather, Microsoft's bid was launched to pre-empt Skype's investors from an IPO.
We don't have the full detail on negotiations between Microsoft's in-house advisers and Silver Lake, Skype's lead investor, and Goldman Sachs and J.P. Morgan, Skype's advisers.
But it's safe to assume that the folks at Skype gave Microsoft a pretty good shake. You can bet they weren't shy about threatening Ballmer with the IPO if he didn't pay up – and fast.
How could Microsoft deny that Skype wouldn't be a hot “once-in-a-lifetime” IPO? Didn't Microsoft see the investor frenzy over Facebook and Groupon and all those crazy Chinese internet stocks? What if Skype was the next Salesforce.com? Wouldn't Microsoft feel silly paying an even bigger takeover premium a few years from now?
And with Microsoft's communications strategy rapidly disappearing beneath the iPhone and Android, Ballmer bought the bluff for $8.5 billion.
Again, this is just my best guess. But it's hard to come up with another scenario in which Microsoft ends up paying such an embarrassing number.
Sure, Microsoft probably engaged in the typical game of “invent the-synergies.” But there's no way Microsoft could concoct enough credible synergies to justify paying 10x revenues and 32x operating profits for such a low-margin business. Year-over-year revenues were up only 20%.
In yesterday's interviews, Ballmer didn't even bother getting specific on the financials. Even he knew that was a lost cause. The most he did was state how the deal was accretive in “year one.” He didn't mention that when your company is sitting on more than $50 billion of cash, almost any deal is accretive.
Nor did Ballmer discuss why Microsoft waited until the stock market had fully rebounded in 2011 to make a play for Skype. Through 2009 and 2010, Microsoft sat on its tens of billions of dollars in cash. Wasn't that why Microsoft had the cash hoard in the first place? To be strong when others were weak? To buy when others had to sell?
With Skype, Ballmer isn't just guilty of poor timing or overpaying. It's worse. He's guilty of putting Microsoft into a position where it is compelled to buy companies like Yahoo and Skype that nobody else really wants.
Microsoft's board would be doing its long-suffering shareholders a favor by making this dumb deal Ballmer's last.
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One only has to look to Andreessen Horowitz [http://bhorowitz.com/2011/05/10/microsoft-buys-skype/] to understand the purchase; why they invested in the first place. There is more to owning a company than the bottom line. One must look at the cost of new user acquisition and other variables to see balance. For example, in 2010 Skype could boast these stat which are much higher today.
500,000 new registered users per day 170 million connected users 30 million users communicating on the Skype platform concurrently 209 billion voice and video minutes in 2010.
Consider that Balmer, as any CEO would in his position, knows things the press and pundits do not. Let’s see if we can defame him this time next year for his purchase of Skype.
This deal reminded me of Time Warner buying AOL.
How did Zune work out for Microsoft? Microsoft execs failed when they tried to become a device maker and content reseller.
As competing with Apple was not enough with an inferior device, Microsoft execs began to compete against Netflix with movie downloads through the Zune Marketplace.
Again, Microsoft needs to spin off any consumer products businesses as their execs do not get at all any business except selling personal seat licenses to corporate America.
Skype is the phone company for people with no money.
The only people using Skype are those calling home to their no-money relatives in far away lands and those who need Internet access through the public library.
No one with a data plan and a cell phone uses Skype. No one who can pay for all-you-can-eat toll calling uses Skype.
Wireless carriers lack any want to support Skype as Skype cuts into revenues. Yet, desperately, Microsoft is trying to convince wireless carriers to support phones made by others that run a Microsoft operating system.
Microsoft finds itself in a death match with GOOGLE and Apple.
Apple execs see themselves as device makers (iPad, iPhone) and content re-sellers (iTunes). GOOGLE execs see themselves as platform makers (Android, AdSense, DoubleClick, YouTube) and ad space sellers.
Microsoft still see themselves as a seller of personal seat licenses for software with the operating system as the chief focus.
In the only time, Microsoft execs tried to establish a platform, such foolish execs went into the hardware business with the Xbox 360 rather than decreeing a spec for any PC seller to make Xbox 360 machines and then selling access software to connect to an Xbox network.
Microsoft needs to spin off their consumer products (Xbox, etc) and exit the cell phone OS business as their execs do not get at all any business except selling personal seat licenses to corporate America. Instead, Microsoft execs should focus on acquisition of business software and engineering software companies.
The days of owning the desktop in the home are coming to an end. Tablets shall replace desktops and laptops for home use. Integration of tablets as wireless remotes for set-top boxes with display on flat screen TVs is coming.
$8.5 billion amortized over 5-10 years. Millions of eye balls to look at Bing Ads on Skype. Hey for the amount of audience, it’s cheaper than advertising on the national TV. Just expense the $8.5 into the traffic acquisition cost for Bing and write it off.
Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Shira Ovide is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to stephen.grocer@wsj.com.
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