The global marketing platform is currently experiencing numerous mergers and acquisitions. Mergers usually involve companies, which can achieve more per company if united as compared to operating alone. The concerned firms may or may not be dealing in the same line of products or services (Cartwright, 2006). On the other hand, acquisitions involve complete purchase of a company by another company. This includes all subsidiaries of the acquired company, and any legal rights, entitled to the use and production of material, or use and dissemination of information, originally belonging to the acquired firm. On May 10, 2011, Microsoft announced its intent to purchase Skype for $ 8.5 billion and the deal was finalized on 13th of October, 2011 (Cartwright, 2006). In this paper, the acquisition of Skype, a Voice over Internet Protocol telephony as well as software company by Microsoft, the global leader in computer software development and sales in the year 2011, will be critically looked at.
Microsoft is a multinational company that develops a wide range of computer products, including the manufacture and licensing of computer software. It is an American Company, whose headquarters is in Redmond, Washington. The firm is the dominant manufacturer of Computer Operating Systems as well as the Office Suite markets. Recently, it has also ventured into the Video gaming market with its Xbox 360 as well as cell phone operating systems with the Windows Phone OS. Microsoft, registered on 4th of April, 1975, is owned by Paul Allen and Bill Gates. Its first operating System (OS), Xenix, was developed in 1980 and was later followed by the MS-DOS (Micro soft- Disk Operating System). In 1984, Microsoft jointly with IBM developed a new operating system, OS/2, and, at the same time, released Microsoft Windows, which was advanced from MS-DOS with graphical capabilities. It became a public company and staged its first Initial Public Offering (IPO) in 1986. Later, Microsoft developed the Windows NT platform in 1993 that took the computing platform higher to 32 bit from the original 16 bit (Allan, 2001).
Microsoft produced new systems, such as the Windows 95 OS in 1995, which also came bundled with new internet and networking capabilities, particularly Internet Explorer and MSN. In 1996, Windows joined with NBC Universal to start the 24 hour cable news station MSNBC. Microsoft released Windows XP operating system in 2001, followed in 2007 by Windows Vista. The company released a yet new operating system, Windows 7, in 2009. The company also launched a new version of its older Mobile phone operating system, Windows Mobile with the Windows Phone OS in 2010, which enable it to compete with rivals Apple and Google mobile applications (Cartwright, 2006).
Financially, Microsoft made profits of $ 5.2 billion in Q1 of 2011, making less than Apple Inc. for the first time in 11 years. That indicates how dominant Microsoft has been in its industry. Microsoft is rated by Moody’s, Standard and Poor’s as AAA Company with an asset base of $ 41 billion. Recently, it releases a corporate bond totaling $ 2.25 billion with relatively low lending rates (Arthur, 2011).
Skype is a multinational company that was originally created by Niklas Zennstrom in 2003 and acquired by Microsoft in 2011. It is software as well as an Internet communications company with an estimated more than 500 million users accounts (Ryan, 2011). It uses the Voice over Internet Protocol (VOIP) to enable voice and video calling worldwide. Skype calls are free to other Skype users, while calls can also be routed to the traditional phone lines and mobile phones and bills settled through a user held debit account platform. Additional services offered through Skype are file transfer and video conferencing. It is a peer to peer network system that uses processing resources on any computer with Skype installed, raising bandwidth license issues with multiple companies and institutions.
Although Skype calls and calls to mobile and landline numbers were available when the company began, the newer video calling as well as video conferencing capabilities were incorporated into Skype in 2006 for Windows and Mac OS X operating system clients. Linux OS clients received the capability in 2008. Skype version 5 beta for Windows allows video conferencing with up to 5 persons, while audio conferencing supports talks with up to 25 people.
Skype’s main competitors are the instant talk and messaging providers such as Google Talk, Google voice, Facetime, Yahoo messager, Windows live messager and iChat. It also has competitors in the VOIP and Telephony industry such as Ekiga and Google voice (Cartwright, 2006).
Acquisition of Skype by Microsoft
Microsoft expressed its interest to acquire Skype on May 10, 2011, for a total cost of $8.5 Billion. The bid was $2.5 billion higher than the amount paid by Microsoft to acquire aQuantive in 2007. While the bid to acquire Skype was definitely a positive strategy that would bring Microsoft about 660 million internet users and give it a leading position as far as internet communications and advertisement is concerned, the price Microsoft was willing to pay was way higher than the perceived current worth of Skype. Skype had earlier been acquired by eBay for $2.6 billion in 2005. In 2007, eBay gave up its 70% stake in Skype after its intended profitability through use of Skype’s telephony services failed. Microsoft, on the other hand, has been experiencing losses in its online services division prior to acquiring Skype. Its online services division, which includes its search engine, Bing, has reported an $8 billion in the last six years, having been profitable the last time in 2005 (Arthur, 2011).
On the other hand, Skype had not been making sustainable profits, owing to the nature of its operations. At the time of its sale, it was relying only on its E-mail service and calls to landlines and mobile numbers for profits. It was estimated to have debts above $ 886 million, which Microsoft would assume in its purchase. In 2010, Skype had revenues of $889.8 million, and a loss of $7 million. Mobile Telecommunications operators have been reluctant to route Skype calls, owing to the competitive nature of data linked calls as compared to their expensive voice connections, a factor that further reduced its revenues. Silver Lake, a company that purchased part of Skype from eBay in 2007, made a $2 billion profit from the sale of Skype to Microsoft. The sale of Skype to Microsoft was concluded on 13th of October, 2011 in cash, making Microsoft the sole owner of Skype, and its former CEO Tony Bates becoming the president of the Skype division of Microsoft (Poletti, 2011).
The value of $ 8.5 billion, for which Skype was purchased, was famously criticized by analysts around the world as being on the higher side. Firstly, Skype’s true value, as is usual with most others services companies, could not be immediately fixed. Save for its fixed assets and liabilities, the rest of its value could only be established through non-cash aspects, such as its average gross revenues, market size, and its current users. Skype had initially been purchased and partly re-sold by eBay in 2007. A 39% stake in the company was taken by Silver Lake. During the sale to Microsoft, Silver Lake announced that it would make $2 billion in profit. Based only on this statement, it can clearly be seen that Silver Lake’s investment of $1 billion in 2007 was tripled after the sale. That means that Skype’s value during its purchase by Silver Lake in 2007 was less than $3 billion or approximately 2.56 billion dollars. It had obviously grown between 2007 and 2011, and a reserved estimate for the value of its growth can be obtained, taking the following indicators
- Continued revenue growth of 20%, based on the market trends around the time.
- A rise in pre-tax operating margin to 30% in the next ten year period
- A decline in its cost of capital to about 10% in the next 10 years, owing to the rapid change in technological advancement.
Taking these factors into consideration, it can be assumed that Skype’s value at the time of sale would be about $ 4 billion. This is less than half of the amount for which it was acquired. However, other factors such as potential for growth, competitive edge status as well as its means of survival, would have led Microsoft to agree to the overrated price. It could also be true that in achieving Skype, Microsoft was little concerned with its value but was purchasing the brand name and the 633 million customers. In either case, it can be agreed that it is very difficult to obtain Skype’s value and its purchase price was based largely on the buyer’s intended purpose upon acquisition. This was the chief challenge during the sale as well as in the financial analysis. This challenge is further amplified by the fact that Skype was a private company and was, therefore, not obligated to make public its financial and audit statements. All its perceived value approximations were based entirely on its initial sale prices and other market indicators.
Intangible Assets in the Purchase
It maybe agreed that Skype sale to Microsoft was more to do with good will and intangible interests that it was to do with its financial statement. Microsoft had already invested huge amounts into its internet and services division, which was running services similar to those of Skype, even during the time of acquisition (Cartwright, 2006). In addition, Microsoft also acquired the Skype logo and trademark, making it easier for customers and other users to find continuity in using Skype. Skype retained most of its employees and its headquarters. It only became a separate division of Microsoft, headed by its former CEO.
Issues, related to the Acquisition
After the purchase, there was a total change of ownership of Skype from its initial owners, mainly Silver Lake and eBay, to total ownership by Microsoft. There was no name change as the company only shifted its ownership. There were minor structural changes too, since most employees were retained, and the locations of its various offices were retained too (Arthur, 2011). It can be said that the acquisition did not use the International Financial Reporting Standards (IFRS), or United States Generally Accepted Accounting Principles (US GAAP) , which requires an organization’s true position be reflected in the books of accounts, specifically the financial statement. This was partly due to the public unavailability of Skype’s records as well as the nature of Skype’s business, which makes it hard to fix its value (Cartwright, 2006).
In conclusion, it can be seen that there is a need for companies to adequately adhere to the aspects of good governance during acquisitions. Failure to do this may lead to unsustainable growth of the concerned firms, both in the short and long-run.