Microsoft and Skype, for and against | FT Alphaville

Microsoft and Skype, for and against

Microsoft’s agreed $8.5bn acquisition of Skype evokes shades of the frenzied dotcom bubble era and M&A tech mania: the deal, unveiled on Tuesday, brings this year’s total of announced tech deals to $94.5bn — a 56 per cent increase from last year – and also marks the highest levels of tech M&A activity since 2000, notes DealJournal.

Even so, the blog notes, this year’s levels hardly compare with the deal-obsessed months of 2000 when five of the largest tech transactions of all time and a total of $226.28bn in tech deals were announced. Indeed, while it’s a whopper in tech land, the Skype deal barely cracks the biggest-ever Top 20 tech deals, it adds.

Nevertheless, the high price of the Skype deal following a wave of others with sky-high valuations and a flurry of tech IPOs has raised concerns about a new — and possibly even more manic – tech bubble. As the FT notes on Wednesday:

The $8.5bn pricetag for Skype is eye-watering on many metrics. It is 32 times its adjusted earnings before interest, tax, depreciation and amortisation. It is also nearly three times the price – $3.1bn – that Ebay paid for the company in 2005. All this for a company that made a $7m loss last year.

Coming shortly after the announcement that LinkedIn – the business networking site which has only recently broken even – was targeting a $3.3bn initial public offering, it has raised fears of yet another tech valuation bubble.

This time around, the surge in tech deal-making has been driven by a host of $1bn-plus acquisitions, although they’re getting bigger, adds DealJournal, noting Microsoft’s Skype deal tops the year’s top tech deals followed by Applied Materials’ $4.97bn bid for Varian and Western Digital’s $4.25bn offer for Hitachi’s hard drive unit.

The Skype deal also provides a badly-needed boost for Goldman Sachs, right to the top of Dealogic’s global tech M&A advisory rankings, even as it has been displaced in the overall global M&A advisory rankings by – yes, JPMorgan

Of global tech deals so far this year, Goldman has advised on more than $34bn worth of transactions, gaining about a 36 per cent market share, while Morgan Stanley – which was not involved in the Microsoft/Skype deal – is in second place with $26.5bn of deals and 28 per cent of market share, according to Dealogic.

Among investment banks, however, the big winner – for now, at least – is JPMorgan Chase, which as DealJournal notes, “may want to break out ping-pong tables, office kegs and other tech-company perks” given its renewed vigor in the tech M&A advisory business.

As for the “new” tech deal frenzy: a timely word of warning comes from Fred Huet, managing director of telecoms and media consultancy Greenwich Consulting, who highlights the difficulty of accurately valuing social media companies, given that they’re bought primarily for their strategic potential.

“People don’t know what the end game will be for these companies, and how they should value them for the long term,” he told the FT. “Companies like Facebook are reporting record advertising metrics, but no one really knows what all those ads are worth.”

Why, then, pay such an eye-popping sum for Skype, or why buy it at all?, asks the Economist, noting:

Perhaps the answer is that Microsoft desperately wants to be seen as a place that is home to cool consumer technologies and hopes that owning Skype outright will give it more credibility as a hive of edgy innovation. The snag is that the firm has fallen so far behind the likes of Google and Apple in the consumer arena that its fall from grace there may well be irrevocable.

Indeed, Lex sums up the sceptics’ view, pointing out how retirees around the world use Skype to stay in touch with grandchildren.

And if you find yourself behind grandma, Lex notes, it’s time to reflect on whether your deal is really “cutting-edge”. In fact, it adds, grandma might well suggest that Microsoft “would be better off saving its money and giving it to the grandkids – which is to say, investors”.

The last word, however, goes to an intriguingly counter-intuitive view from Forbes’ Eric Jackson, who writes:

Ninety-eight percent of the business press, bloggers and investors are laughing at Microsoft (MSFT) this morning for buying Skype. It’s not so much that they object to the deal – it’s that they object to the $8.5 billion being paid. And the Chicken-Littles screaming about another dot-com bubble are out in full effect.

Among his numerous arguments defending Microsoft’s decision and the money paid for Skype, Jackson says: “Even if Microsoft makes no money from this deal, they’ve weakened Google a little from taking this asset from them.”

In addition, he argues, “Microsoft could license Skype software to Facebook (in which they already have a strategic investment) to make Skype and Facebook more valuable”; and, “although Microsoft has made dumb acquisitions in the past and managed them poorly (so has Google and most big tech companies), does anyone still say that Microsoft overpaid when investing in Facebook at a $15 billion valuation a few years ago?”

Whether you agree or not, it’s worth noting that the same could be said for many big tech deals and valuations in the past years.

Related links:
Ballmer and Bates on the Microsoft/Skype deal – FTTechHub
Skype investors reap windfall in Microsoft deal – DealBook
Knocking at the door of tech heaven – FT
Did Microsoft overpay for Skype? Hell yes – TechCrunch