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Microsoft's Acquisition of Skype

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  • SaaS- Software as a service
  • Microsoft-Skype

    1. 1. Group 9 Soumyajit Sengupta 12P171 Aneesha Chandra 12P186 Arunabh Thakur 12P190 Karthik Kollipalli 12P204 Mergers & Acquisitions, Section B A POSSIBLE SUCCESS STORY IN THE MAKING Microsoft‟s Acquisition of Skype
    3. 3. Technology Industry Scenario 2010-11 : The Recovery Era  Period of Recovery - Renewed Optimism and Strengthening balance sheets  Increasing spending on IT products and services  Consumers expected to spend $2.1 trillion on technology products and services worldwide Key Trends  Consolidation ( Expansion into new technology, Industry and Geographies)  Licensed Software(SaaS)  Virtualisation (VoIP) Top 13 deals ($1 billion +) of the top 100 global technology companies, full-year 2010 Opportunities  Cloud Services  Security products and services  Healthcare IT markets  Virtualization products and services  Mobile services (expected to generate 37% of total worldwide consumer technology spending in 2012)  Entertainment Services Tech Market Factors: Economic Growth Versus New Tech Adoption By Country
    4. 4. VoIP Industry Scenario 2010-11 : Fastest growing Industry in U.S  Growth of 12.6% in 2010  Industry expected to grow by 16-17% in the next 5 years Key Drivers  Cost Savings and Greater efficiencies  Increasing Global Network and Wireless bandwidth capabilities (3G)  Increased adoption by China, Japan, South Korea  VoIP aligning with cost cutting strategy of firms post recession  Expanding SMB and enterprise offerings. VoIP, video conferencing and real-time communication capabilities Key Trends Strategic Collaboration & Integration  Hardware Providers (Avaya , Verizon with Skype)  Technology (Facebook with Skype)  Mobile Operators (KDDI Japan with Skype)  Technology Compatibility (Ex: Skype for Android)  M&A on the rise Challenges  Regulatory Compliance (Open Internet Access)  Quality and Reliability of VoIP services  Free Business Models Announcement Date Acquirer Target Company Feb-10 Comcast New Global Telecom May-10 Google, Inc. Global IP Solutions, Inc. Oct-10 ShoreTel Agito Networks Nov-10 M5 Networks Geckotech Nov-10 Cbeyond, Inc. Aretta Communications Apr-11 M5 Networks Callfinity Apr-11 West Corporation Smoothstone IP May-11 Microsoft Skype Jun-11 USAN, Inc. Interactive Softworks, Inc. Jul-11 Interactive Intelligence CallTime Solutions Sep-11 8x8 Inc. Contactual Inc. Sep-11 Broadsoft iLinc Communications Oct-11 Avaya, Inc. Sipera Systems, Inc Dec-11 Stage 2 Networks hosted division of CTI Dec-11 Warwick Valley Telephone Alteva
    5. 5. Microsoft – Company Profile Company Overview  Incorporated on September 22, 1993  Involved in developing, supporting and licensing an array of software products and services  Also works to design and sell hardware, and it delivers online ads to the customers  Number of employees: 90000 Full Time  54000 US and 36000 International  35000 Product research, 250000 Sales and Marketing, 16000 product support, 5000 manufacturing VISION To help people and businesses throughout the world to realize their full potential Key Divisions Windows and Windows Live  Develops and markets PC operating systems, PC hardware products and related software and online services  Products – Windows 7, Windows Live, hardware  Competitors – Apple, Google, Yahoo! Server and Tools  Develops and markets server software, services, software developer tools, and solutions  Products – SQL server, Intune, Visual Studio, Silverlight  Competitors – HP, Oracle, IBM, Adobe, Intel, Google, SAP Microsoft Business Division  Develops products that are designed for increasing personal, organizational and team productivity  Products – Office, Lync, SharePoint and Exchange  Competitors – Adobe, Apple, Corel, Google, IBM, Oracle Entertainment and Devices  Develops and markets products and services designed to entertain and connect people  Products – Xbox, Kinect, Mediaroom, Windows Phone  Competitors – Nintendo, Sony, Apple, Google Online Services  Develops and markets information and content designed to help people simplify tasks online, and help advertisers to connect with audience  Products – Bing, Atlas, MSN and ad Centre  Competitors – Google, Yahoo Acquisition History  Microsoft acquires an average of 6 companies per year  Acquired 18 companies in 2006  Some notable acquisitions are:  Forethought – Created Microsoft PowerPoint  Hotmail – Free webmail service  Navision – Developed technology for ERP software  aQuantive – advertising company
    6. 6. Skype – Company Profile Company Overview  Global technology leader that enables real- time communication over the Internet  The software-based communications platform offers high-quality, easy-to-use tools for consumers and businesses to communicate and collaborate globally through voice, video and text conversations  663 million registered users, out of which 8.8 million are paying users  During 2010, Skype‟s users  made 207 billion minutes of voice and video calls using Skype  Sent over 176 million SMS text messages through Skype  Video calls accounted for approximately 42% of all Skype-to-Skype minutes  Strategic Relationships with leading mobile operators (Verizon Wireless in USA, KDDI in Japan)  Uses peer-tp-peer architecture which gives them a significant cost advantage as no physical communications network required Products and Features  Mobiles – Skype‟s products are on multiple platforms including iOS, Blackberry, Linux, Android and Symbian  Integrated Features – Integrated with Facebook  Premium Products – Additional features like group video calling, live chat customer support, discount on HD webcams, etc.  Marketing Services, including Advertising - Allows businesses to market their products or services selectively to Skype‟s user base, including Click & Call, which enables users to initiate a Skype call from a website to participating businesses  Skype Enterprise- Skype Manager allows businesses to manage Skype accounts for their employees; Skype Connect allows businesses to connect their private telephone branch exchange (PBX) over the Internet to the peer-to- peer network of Skype users to achieve low-cost calling Competitive Strengths  Large, highly engaged, growing and diverse global user base  Strong network effects  String communications brand  Low cost and highly scalable peer-to- peer architecture  High-quality, multi-feature voice and video product suite  Payment infrastructure  Software platform that is device and network agnostic  Attractive financial structure Key Shareholders  Silver Lake  eBay International AG  Joltid  Canada Pension Plan Investment Board  Andreessen Horowitz
    7. 7. DEAL DETAILS
    8. 8. Deal Rationale  Enhances Microsoft‟s portfolio of real-time communications products and services  Microsoft had a long-standing focus on real-time communications across its various platforms including Lync, Outlook, Messenger, Hotmail and Xbox Live  “Increases the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities”  Cross-selling the vast array of Microsoft family products to Skype users  The key opportunities would be core communications service,, new premium subscription packages (monetization), in-app advertising and mobile space  Allows integration of Skype with Windows Phone, Nokia and Windows Office making it a competitive offering to Google Voice and Apple‟s emerging communication platform, Facetime  Skype‟s peer-to-peer video chat adds another potentially more efficient and easier way to place video calls  Microsoft lags in new fields like smart-phone software  Microsoft‟s current platforms are client-server systems  Peer-to-peer technology is better suited to the cloud computing era
    9. 9. Deal Rationale (contd.)  Skype‟s video, voice and sharing capabilities would give Microsoft a boost in enterprise collaboration market  Allows Microsoft to compete against Cisco and Google  Creation of Microsoft-Skype World  Skype will support Microsoft devices like Xbox, Kinect, Windows Phone etc.  Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities  Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms  Microsoft saves time and effort in building out its own VoIP infrastructure  Gives Microsoft a working relationship with carriers who are looking to partner with Skype as they start to transition to LTE-based networks  Skype is a must-have application and service which will help in the adoption of the future versions of Windows Mobile operating system
    10. 10. Deal Rationale (contd.)  Skype is a great brand, especially for customers  Allows Microsoft to revive its internet advertising revenue  Prevents Google and Facebook from acquiring Skype (There were rumours that these companies were interested in Skype)  Allows Microsoft to hold onto SOHO/SMB market  Skype had a huge user base of more than 660 million users, including more than 120 million active or “connected” users  Rate of growth of users is 40% per annum  Microsoft had huge cash balances of around USD 50 billion  As an economic transaction, Microsoft was able to acquire Skype on a tax efficient basis using offshore cash  As Skype is based in Luxembuorg, the corporate tax rate applicable is 25.2% (US corporate tax rate is 39%!)  80% of Microsoft‟s cash balances are abroad
    11. 11. Deal Modalities  On 10 May, 2011, Microsoft announced that it would be acquiring Skype  Total consideration would be $8.5 billion in cash  Skype will become a new division of Microsoft with the Skype CEO, Tony Bates heading the newly created division.  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
    12. 12. Key Risks for Microsoft  The rates of net revenue growth may decline  The rate at which registered, connected and paying users are added may decline  Failure in converting registered users in paying users  Number of registered and connected users may be overstated  Most of the products of Skype are free and a small proportion of the users are paying users. Thus, even a small decline in the paying users has a major impact on the revenue generated  Highly competitive industry characterized by rapid technological changes  Emergence of new competitors/technologies may make Skype obsolete  Regulation of Internet communications products  Possibility of Skype getting banned in countries (e.g. Already banned in UAE, Egypt)  Brand value can be affected if users concerns about the use and protection of personal data and privacy of their communications
    13. 13. Reaction to Acquisition Announcement Microsoft’s share price declined by 0.5% to $25.68 on the day of announcement eBay’s share price increased by 2.5%
    14. 14. Reasons Behind Negative Reaction  Skype did not seem to improve Microsoft‟s revenues and profitability majorly  The valuation of Skype was very high (10x revenues and 34x EBITDA v/s the industry average of 7x-8x EBITDA), given the Y- o-Y revenue growth of just 20%  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 too high  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 Skype users into future Microsoft revenues  Skype‟s revenue per user is low  Only 8.8 million Skype users out of 663 million users were paying customers (a meagre 1.3% of total users)  There can be several integration issues  Microsoft‟s acquisitions have generally led to entry into new businesses with minimal overlap with the existing business  In case of Skype, Microsoft would have to integrate several technologies and products for this acquisition to work  Microsoft‟s bureaucratic structure may create hurdles in the path of successful integration  The timing of the purchase was not right as the stock market had fully rebounded in 2011  As Microsoft had its large cash balances in 2009 and 2010, it would have been a better time for the same deal  Peer-to-peer technology takes up a lot of bandwidth and was considered inefficient
    16. 16. Previous Acquisitions by Microsoft Landmark Acquisitions Company Deal Value Deal Rationale Success factors Failure Factors Success Rate Forethought $ 14 Mn  To add presentation program to portfolio of Ms Office  To give the company presence in Silicon Valley  Creation of PowerPoint  Gave Microsoft a Silicon Valley presence  Acquired a talented pool Hotmail $500 Mn  To have a complete portfolio of free email and search engine  To drive traffic to its revenue- generating sites by keeping users within the Microsoft circle  Increased scalability of service  Increase in number of members  Higher traffic on other Microsoft sites like Expedia  Growth of Gmail  Hotmail lacked the unlimited storage and clean and professional interface of Gmail Navision $1.3 Bn  To provide the strongest .NET applications and development platforms, including extensible accounting solutions based on the .NET platform  Microsoft Dynamics NAV became a successfully recognized global solution  Change of name was detrimental
    17. 17. Company Deal Value Deal Rationale Success factors Failure Factors Failure/ Success Aquantive $6 Bn  To compete with Google and other rising computer companies by giving it exposure to search-based advertising  Focus was made on search advertising whereas aquantive specialized in display advertising; Aquantive started lagging behind rivals Danger $500 Mn  To get a perfect complement to Microsoft‟s existing software and services  To improve mobile experiences  Talented workforce with rich experience in what customer want from a mobile  Another department set to build Windows 7; Made danger useless; Internal fighting Fast Serve $1.2 Bn  To gain proficiency in enterprise search which was becoming an indispensable tool to businesses of all sizes, helping people find, use and share critical business information quickly  Deep talent pool expertise in high-end search solutions  Increased Microsoft‟s research and development presence in Europe  Lack of due diligence – the company was charged with accounting fraud and raided by police few months later Greenfield Online $486 Mn  To extend Microsoft's search and e- commerce services in Europe  Gain in market share in Europe 3DV $35 Mn  To gain a stronger foothold in the video game console market by use of 3D animatronics.  Xbox Connect uses 3D sensors for its operation  Allowed it to compete with Nintendo Wi Previous Acquisitions by Microsoft Recent Acquisitions
    18. 18. Previous Acquisitions by Microsoft Minority Stake Acquisition Company Deal Value Stake Size Deal Rationale For Microsoft Deal Rationale For Company Success Factors Overall Success Facebook $240 Mn 1.60%  Keeping Google at bay  Gain cachet in the burgeoning internet economy  Facebook can hire more employees, build its website and handle more traffic  Microsoft will get exclusive rights to sell advertising on Facebook, which presently has little revenue-raising content Apple $150 Mn 150,000 shares  Patent and technology cross-licensing agreements between Apple and Microsoft  Apple agreeing to install Internet Explorer as the default Web browser on all Macs,  Bail out for Apple which would have otherwise gone bankrupt leaving Microsoft to have a monopoly  Turnaround of Apple meant high growth in stock prices which would have allowed Microsoft to earn considerably higher profits when compared to the $8 at which Microsoft bought it
    19. 19. Key Takeaways  Microsoft has had a series of both successful and not so successful acquisitions in the past  A key point to note is that most of the recent acquisitions have not performed that well  Integration is not one of Microsoft‟s fortes and in case of Skype, the pace and extent of cultural and technological integration can make-or-break this deal
    21. 21. Skype Valuation Transaction Comparables Acquirer Target Paid User Base (in '000s) Deal Value (In $ Millions) Equity Value/ User Base Telanetix AccessLine 100 34.9 0.35 Google Global IP Solutions 150 68.2 0.45 Google Gizmo5 6,000 30.0 0.01 Google On2 Technologies 100 106.0 1.06 ShoreTel Agito Networks 190 11.4 0.06 Intermedia Telanetix 290 42.0 0.14 Median 0.25  Paid User Base of Skype (in „000s) = 8,800  Estimated Equity Value = $2.173 billion  Premium Paid by Microsoft = 291.2%
    22. 22. Skype’s revenues have been growing at a CAGR of 55% after Microsoft’s acquisition. Thus, Microsoft actually just paid a premium of 14%! Skype Valuation Discounted Cash Flow  Historical financial data for 2009-2011 based on Skype‟s SEC filing on March 4, 2011  Key assumptions:  WACC for initial years = 12%  Terminal WACC = 6%  Revenue CAGR for next 5-years = 35%  Terminal Growth Rate = 3%  Equity Value = $2.27 billion  Premium Paid by Microsoft = 274.4% Terminal Period Growth TerminalWACC 1% 2% 3% 4% 5% 2% 10526.0 NM NM NM NM 4% 2624.1 4285.0 9268.1 NM NM 6% 1089.8 1532.6 2270.6 3746.6 8174.7 8% 458.6 646.5 909.6 1304.1 1961.6 10% 124.4 222.4 348.4 516.3 751.3 Sensitivity Analysis Equity Value (in $ million) Estimates Revenue CAGR 2011-15 Equity Value (in Mn) Premium/ Discount Industry Estimates 20% 544 1,462% Analyst Estimates 35% 2,270 274% Microsoft‟s Estimates 40% 3,174 168% Actual 55% 7,438 14%
    23. 23. Post-Acquisition Results  Currently, the acquisition has bore positive results –  Skype has been integrated with Microsoft Lync and integration efforts are continuing  Skype has reported strong revenue growth (CAGR) of 55% in the past two years
    25. 25. Facebook The Clear Winner  Microsoft had purchased 1.6% stake in Facebook for $240 million in 2007  On its own, Facebook had no or very low chance of purchasing Skype  However as Microsoft is an investor in Facebook, the latter would get access to Skype‟s assets  At the same time, Google would not have access to Skype  Thus, even though Microsoft finally purchased Skype, Facebook came out as a clear winner  Why Microsoft gave this access to Facebook? – The Microsoft-Skype- Facebook trio make a worthy competitor to Google
    26. 26. Developments in 2013  Cisco challenged European Commission‟s approval of Microsoft‟s acquisition of Skype  The arguments are that the acquisition creates an unfair monopoly and that there could be serious harm to consumers:  Around one-third of world‟s voice communication is via Skype  Microsoft would control 80-90% of the market for video calls on Windows-based computers  Microsoft was required to make no concessions in its purchase  The counter argument given by EC is:  There is no evidence of competitive harm  Other emerging technologies can succeed making Skype obsolete  Cisco‟s main demand is inter-operability – the capability of any device to connect to any content that allows Internet to grow  If Cisco wins this case, then Microsoft may have to annul its acquisition of Skype
    27. 27. THANK YOU