Tuesday, May 10, 2011

Microsoft's acquisition of Skype will be impossible to evaluate using traditional M&A criteria

Everybody, it seems, has an opinion about the news that Microsoft has purchased Skype. Most people are pretty negative about the acquisition, and how can blame them. At $8.5 billion and little if any profit, we are looking at a deal worth ten times revenue. The deal simply can't be evaluated in traditional M&A terms (but if it could it would be considered absolutely crazy).

Right now Microsoft's stock is down, though I wouldn't read too much into that as the purchasers stock almost always goes down following an acquisition announcement.
Charles Arthur of The Guardian posted his own evaluation and I agree with most of Arthur's conclusions:

So what then is Skype? It's a trophy. But Microsoft would be wise not to think it's won the match. The most interesting thing will be Google's reaction: it has its own VoIP service, Google Talk, and we'll know whether it thought Skype was a clever acquisition from what it says in the next few days. The numbers, though, suggest that Steve Ballmer has made headlines, but it's not going to help the stock.
For me, the problem with acquiring Skype lies with Skype itself. It has been a great product for many people, and is so widely used in Europe that it has becoming a generic name like Kleenex or Google. I've heard many people even call using FaceTime "Skyping" when they were being imprecise. But Skype itself seems like a dead-end: rather than something that is being integrated into other apps and systems, it is sitting by itself sort of the way AOL found itself isolated as a lone community once the web boomed.

For me, as someone with extensive M&A experience, the move by Microsoft only makes sense to me if the company knows it is heading in a certain direction but the presence of Skype is that strategy's biggest drawback – like someone saying they want to go into the search engine business but realize that they will be prevented from doing so by another company (you have heard about that company, Google). If you could get rid of that competition in the stroke of a pen then your business idea can proceed.

Is Microsoft really that strategic? And at $8.5 billion, will it be worth it? Or are they getting punch drunk from all the negative press?