Microsoft Buys Skype, Obtains FTC Approval

Insights June 30, 2011

Microsoft made the headlines on May 10, 2011, when it acquired videoconferencing giant Skype for a reported $ 8.5 billion.  Following the antitrust procedure of the Hart-Scott-Rodino Act, the companies filed a pre-acquisition notification to the various government bodies, required before the deal can be finalized.

Generally, the companies need to show that the acquisition will not make the market uncompetitive, or be harmful to consumers.  On June 17, 2011, the FTC approved of the proposed deal, but the companies are still waiting on approval from the European Union and the U.S. Department of Justice.

Skype was founded in 2003, acquired by eBay in 2005, then sold by eBay to Silver Lake Partners in 2009.  Skype reported nearly 700 million registered users and had an overall profit of $20 million in 2010.  Despite these promising metrics, Skype also carries a long-term debt of $686 million – this has been significant enough for Skype to indefinitely postpone its IPO, which it filed for last August.  As such, this acquisition by Microsoft is likely a boon for Skype and Skype’s investors.

Microsoft stands to benefit equally in the biggest deal in the company’s 36-year history.

First, the deal allows Microsoft to diversify and redefine itself as a major player in the intersection of communication and technology.  Microsoft can suddenly serve a competitive offering against the likes of Cisco’s WebEx, Apple’s FaceTime and Google’s Google Voice, not to mention quickly rising smaller companies such as ooVoo.  Perhaps just as important is the fact that Microsoft’s acquisition keeps Skype out of the hands of competitors, namely Facebook who reportedly also considered bidding for Skype.

Second, Microsoft will be able to greatly expand its business model.  The majority of Microsoft’s profits are still derived from its two flagship products: Windows operating systems and Office applications.  Now, there are already plans to broadly integrate Skype videoconferencing and messaging technology into the Windows Phone and Kinect’s functionality, and Xbox and Outlook’s interface, to name a few.

Recent developments have surfaced concerning the pending acquisition.  First, eight top Skype executives have left the company since the acquisition was announced.  This was reportedly a move to save money because their stock options would have been worth far more if they were released after the acquisition.  This might have the unfortunate side-effect of initial integration headaches.

Second, Skype’s interesting employment contracts have been brought to light.  Specifically, reports have surfaced that Silver Lake has a so-called repurchase right, camouflaged in legalese and a long non-descript paragraph, that allows them to buy back vested Skype employee shares at the grant price.  This makes the shares literally worthless to the employee, and completely undercuts the incentives that vested shares are designed to reward.

This deal comes at an opportune time for both parties.  Microsoft’s competition, notably Apple and Google, have continued to innovate better and faster than Microsoft in recent years.  This move ensures that Microsoft isn’t left behind.  Skype on the other hand may find a way to leverage Microsoft’s ubiquity to reduce its debts.