14 And 116: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype *

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The big news yesterday was Microsoft’s acquisition of Skype for a striking sticker price of $8.5 billion.

Most people stopped at the price, expressing surprise that Microsoft could spend so much money for a company that had recently been spun out at a $2.5 billion valuation.

But here are two numbers that explain the logic behind the deal: $14.7 and 116.

What do they mean?

$14.70 is what Microsoft paid per user for Skype, according to Atomic Inc. When eBay bought Skype back in 2005, they paid $45.60 per user. So Skype’s price went up, but its price per user went down. Another way to look at it is that when Microsoft invested in Facebook at a $15 billion valuation, a move then viewed as an act of desperation and now recognised as a masterstroke, the social network had less than 100 million users, which works out to more than $150 per user. Comparatively, Skype is a bargain.

116 is the number of days until Microsoft makes the money back in operating cash flow. Microsoft had $26 billion in operating cash flow last year. So $8.5 billion works out to around 116 days of cash flow for Microsoft. That money would have been rotting on the balance sheet anyway. Given the possible synergies between so many of Microsoft’s products–Windows Phone 7, Kinect, Lync, etc.–that’s cheap. Of course, it’s all up to good execution whether those synergies can be accomplished, but even the option on them is worth that kind of money.

Correction: We originally used a measure of Microsoft’s free cash flow for Q1 2011 we got from Wikinvest, and that number was off. We apologise for our error.

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