With the news that Microsoft is all-but certain to acquire Skype for over $8 billion including debt, the question becomes: what does this mean?Skype is an enormous service with over 500 million users, and a transformative potential in many areas of technology, from telecommunications to social networking. The potential ramifications are huge.
Skype's investors bought in at a $2.5 billion valuation two years ago and are selling for $7 billion ($8.5 including debt). That's called winning.
Especially when the company's IPO had been postponed and it didn't look like a bidding process would have been straightforward: Facebook, reportedly interested, doesn't have the cash, and Google (or Cisco) would have had the deal mired in antitrust forever.
Marc Andreessen is a partner at Andreessen Horowitz, one of the investors in Skype. He sits on eBay's board and was key in putting the deal together, and now he got the first big exit for his new VC firm. With this deal, he cements his status as one of the most powerful dealmakers in Silicon Valley.
Niklas Zennstrom and Janus Friis, who originally founded Skype, weren't invited in the original buying syndicate. But thanks to some key intellectual property behind Skype that they own, they bullied their way in with a lawsuit, pushing out Index Ventures and its Partner Mike Volpi. Their stake is now worth $1.1 billion. Talk about double dipping.
Skype's executive team is mostly made up of hired guns brought in from Cisco and other big companies by the new investors, only a couple years ago. They almost certainly won't stick around for the Microsoft era and are probably already shopping for private islands and yachts.
Facebook tried to bid for Skype when it looked like Google was interested. Skype would be a great potential partner for Facebook, giving them added video and voice chatting capabilities, and a great asset for Google in its war with Facebook over the 'social graph'. Instead of having to actually buy Skype to keep it off Google's hands, its longtime partner and shareholder Microsoft did it on Facebook's behalf.
A huge component of the Skype deal is mobile. Google has Voice, Apple has FaceTime. Now Microsoft has an amazing asset it can tie into Windows Phone 7. That's good news for Nokia and other Windows Phone 7 partners like HTC and Samsung.
eBay was roundly mocked for buying Skype, which everyone saw as a money-burning extravaganza. Now eBay gets $2.4 billion for its stake into the company, after selling the rest for over $1 billion, all for something it bought for $2.5 billion. In the end, eBay made money on Skype.
How the Skype deal turns out for Microsoft depends on what Microsoft does with it.
On the one hand, it's an amazing asset with tons of potential. And using cash for acquisitions is better than letting it sit on the balance sheet (but might be worse than returning it to shareholders).
On the other hand, Microsoft is just bleeding money online, and Skype loses money. Is it really time to add more red ink?
A big source of growth for Skype was always going to be business conferencing. But Skype has consumer DNA, so Cisco was able to use its hold into the enterprise and sales power to keep them away from the gravy train. Now Skype has a home with a company that does nothing so well as sell software to companies. WebEx, its video conferencing suite, was one of Cisco's biggest and most successful acquisitions, but it looks like it's going to take a hit.
Google was probably never really interested in buying Skype. It doesn't need the technology and barely needs the userbase. It has Android and Google Voice. But it was interested in bidding up the price and getting Microsoft to pay through the nose. And that it did perfectly.
But if Microsoft is smart about Skype, it's an asset they can use to compete better with Google in many important areas, from enterprise software to mobile to social networking, and that will matter more than paying a few extra billion that would have been sitting on its balance sheet anyway.
Index Ventures, the most prominent European VC firm and an original investor in Skype, was slated to invest in the Skype spinoff, but got pushed out by the Skype founders' lawsuit.
In particular Mike Volpi, a former top Cisco exec and CEO of Joost, the Skype founders' next venture, was sued by the Skype founders and booted out. If we were him, we'd be drinking heavily right now.
Skype is basically an American company now. It already had mostly American investors, and now it's owned by Microsoft. Tech hubs like Silicon Valley are often built around big, important public companies that irrigate the ecosystem by buying up smaller companies, turning early employees into angels or entrepreneurs and being an example. Skype was Europe's biggest success. It was already unlikely that it would be a big, standalone European success but now that dream is gone for good.
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