Is Microsoft Buying Skype to Keep It Away From Google?

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 |  Includes: EBAY, GOOG, MSFT
by: 451 Research: Inorganic Growth

By Ben Kolada

In its largest-ever deal, Microsoft (NASDAQ:MSFT) announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google (NASDAQ:GOOG), which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay (NASDAQ:EBAY), sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (Pending:CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn
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Source: The 451 M&A KnowledgeBase