Microsoft and Skype

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Microsoft and Skype

  1. 1. ANALYSIS OF MICROSOFT'S STRATEGIC ACQUISITION SKYPE Michael Osypenko Veranika Zdanovich Ruslan Samchuk Denis Solyan
  2. 2. MAIN GOALS OF PROJECT • Analyze Microsoft’s latest acquisition of Skype • Understanding Skype’s and Microsoft’s business models and their product portfolio respectively • Microsoft’s reasoning behind the acquisition • How Microsoft got best benefits from the acquisition • To analyze data support of acquisition • Make your own critical conslusions
  3. 3. KEY FACTS AND FIGURES 10th May 2011: Microsoft acquirers Skype at a price of $8.5 billion (cash) Financial multiples (Skype 2010): companies Very high relative to other Enterprise value/EBITDA: > 32x within the IT sector! Skype is growing rapidly (from 2009 to 2010): • User base: 40% • Calling minutes: 150% (18 months) • Revenue: 20% • EBITDA (adj.): 40%
  4. 4. AIMS OF THIS ACQUISITION FOR MICROSOFT Strategic reason • In line with Microsoft’s growth strategy • Prevent competitors such as Google and Apple from buying Product reason • Skype is the perfect complement to Microsoft’s existing products • Live video chat on Windows computers and Xbox 360 • Communication when working with Microsoft Office • Call-back and instant messaging features in Outlook • Increase competitiveness on the Windows Phone 7 mobile platform Network reason • Leverage the network effects • Direct line communication with Skype’s large customer base (ca.700 million) • Connect Skype users with Lync, Outlook, Xbox Live and other communities
  5. 5. MICROSOFT CAN LEVERAGE SKYPE IN SEVERAL WAYS Pros: • Acquisitions is in line with the company’s growth strategy • Prevent competitors from acquiring Skype • Skype’s technology is complementary to MS products and can be integrated in all of the company’s business segments • The company got access to Skype’s large customer base Cons: • Concerns about the high acquisition price • Problems to integrate (retaining employees, organizational etc.)
  6. 6. MICROSOFT World’s largest software company based on software revenue. Microsoft’s mission is to create technology that transforms the way people work, play and communicate.
  7. 7. MICROSOFT’S PRODUCT PORTFOLIO
  8. 8. REVENUE AND PROFIT OF MICROSOFT
  9. 9. MICROSOFT’S OBJECTIVE AND STRATEGY • Time is a critical factor in this business it takes much longer time to develop a well functioning product themselves than to acquire. • By buying Microsoft gets Skype’s existing customer base • Large pile of cash is being put to work “Strategic partnerships and acquisitions have always played an important role in Microsoft's strategy for growth and technology leadership.” Steven A. Ballmer (Microsoft CEO) leverage the network effect
  10. 10. SKYPE BUSINESS MODEL • Freemium • Free-of-charge services • Premium services
  11. 11. SKYPE
  12. 12. SKYPE REVENUE
  13. 13. THE DEAL - Total consideration would be $8.5 billion in cash - Skype will become a new division of Microsoft - 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
  14. 14. REACTION TO ACQUISITION ENOUNCEMENT
  15. 15. KEY RISK FOR MICROSOFT The rate of financial performance may decline KEY QUESTION OF MICROSOFT How have the acquisition affected on the share performance?
  16. 16. FINANCIAL OVERVIEW OF SKYPE AND MICROSOFT
  17. 17. REASONS BEHIND NEGATIVE REACTION • Skype did not seem to improve Microsofts and profitability • The valuation of Skype was very high (10x revenues and 34x EBITDA v/s the industry average of 7x-8x EBITDA) 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 to high • • Microsoft had large cash balances it would have been a good time for the deal • 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 users into future Microsoft revenues • Skype revenue is low • Only 8.8 million Skype users out of 663 million users were paing customers (meagre 1.3 of total users)
  18. 18. TRANSACTION COMPARABLES Paid User Base of Skype (in ‘000s) = 8,800 Estimated equity value = $2,173 billion Premium paid by Microsoft = 291,2%
  19. 19. SKYPE FINANCIALS BEFORE QUIZITION, THOUSANDS OF U.S. DOLLARS 700 600 Net revenue 500 Gross profit 400 Total operating expenses 300 Net income (loss) 200 100 0 December 31, 2007 December 31, 2008 November 18, 2009 June 30, 2009 June 30, 2010
  20. 20. DISCOUNTED CASH FLOW
  21. 21. MICROSOFT FINANSIALS BEFORE AND AFTER AQUIZITION MILLIONS OF U.S. DOLLARS 90 80 70 Net revenue 60 Gross profit 50 SG&A Expense 40 Net income loss 30 20 10 0 June 30, 2009 June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013
  22. 22. Microsoft's shares oustanding, figures in billions 9.1 9 8.9 8.8 8.7 8.6 8.5 8.4 8.3 8.2 8.1 8 Basic Shares Outstanding Diluted Shares Outstanding June 30, 2009 June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013 Microsoft's EPS 3 2 EPS (basic) 1 EPS (diluted) 0 June 30, 2009 June 30, 2010 June 30, 2011 June 30, 2012 June 30, 2013
  23. 23. POST ACQUISITION RESULTS Skype has been integrated with Microsoft link and integration efforts are continuing Skype has reported high revenue growth (CAGR) of 55% in the past two years
  24. 24. BENEFITS AND SYNERGIES OF THE ACQUISITION 1. Strategic reason • a. In line with Microsoft’s growth strategy • b. Prevent competitors such as Google and Apple from buying 2. Product reason • a. Skype is the perfect complement to Microsoft’s existing products • b. Live video chat on Windows computers and Xbox 360 • c. Communication when working with Microsoft Office • d. Call-back and instant messaging features in Outlook • e. Increase competitiveness on the Windows Phone 7 mobile platform
  25. 25. 3. Benefits and synergies of the acquisition Network reason • a. Leverage the network effects • b. Direct line communication with Skype’s large customer base (ca.700 million) • Connect Skype users with Lync, Outlook, Xbox Live and other communities DEFENSIVE RATIONALE If Microsoft did not buy Skype, it may have ended up in the hands of a competitor such as Google, who might be able to use it to strengthen its ecosystem at the expense of Microsoft. OFFENSIVE STRATEGY Google’s acquisition strategy is usually to acquire earlierstage companies than Microsoft’s deal to acquire Skype. Google purchased YouTube for $1.6 billion in 2006.
  26. 26. POSSIBLE ISSUES WITH THE ACQUISITION 1. • • • 2. • • High price Skype is growing quickly Value is exponential correlated with number of user Price/user: Skype 12 $ aFacebook 62 $ Hard to integrate Ebay had a hard time integrating Skype complementary to Microsoft’s business strategy. Acquisitions are a quick way to move into the space that these tech giants see evolving, such as Microsoft seeking to broaden its communication base, Google expanding beyond search to experiment with new models of advertising, and Facebook’s attempts to learn from the human capital that they are able to acquire
  27. 27. CONCLUSION Microsoft bought a complementary company, hence Skype mirrors many of Microsoft’s existing products and in our opinion can Microsoft leverage Skype in several ways. • Pros 1. Acquisitions is in line with the company’s growth strategy 2. Prevent competitors from acquiring Skype 3. Skype’s technology is complementary to MS products and can be 4. integrated in all of the company’s business segments 5. The company got access to Skype’s large customer base • Cons 1. Concerns about the high acquisition price 2. Problems to integrate (retaining employees, organizational etc.)
  28. 28. THANK YOU FOR YOUR ATTENTION!

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