Microsoft’s acquisition of Skype
On 10 May 2011, Microsoft announced that it would buy Skype for $8.5 billion. The price tag was undoubtedly high – roughly ten times Skype’s revenues in 2010 ($860 million), around twice its recent valuation. In late 2009, eBay sold the majority of its stake in Skype to an investor group led by Silver Lake Partners at a valuation of around $2.75 billion. What makes this more interesting is that Skype itself had not been profitable since its foundation in 2003. So what was the reasoning behind the deal? How did Microsoft finally arrive at that price? Why was it willing to pay such a large amount of money? Was there something more? The brand, the networking, the technology, the possible strategic and product synergies…?
The case provides a good opportunity to discuss valuation issues in a fast-growing company in the high-tech industry. The acquisition was undoubtedly expensive. But how did Microsoft arrive at that price? Let us go back to valuation basics. What was the value of Skype at the time? Although it was a private business, Skype was ready to go to public in 2010 and therefore some inside information is available about its financial performance. Based on these documents as well as analysts’ reports, participants can learn how to justify a firm’s valuation by using the discounted cash flow method. Both Microsoft and Skype were large-sized companies operating in the technology sector. The case also provides a good opportunity to discuss the characteristics of the industry in general as well as the strategic/synergistic fit of these two companies.
Microsoft
2011
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